Mercatus Scholars Submit Comment Letter Regarding FINRA's Rule Proposal to Implement CARDS (with Lofchie Comment)

Scholars from the Mercatus Center at George Mason University submitted a letter to FINRA regarding it's rule proposal to implement the Comprehensive Automated Risk Data System ("CARDS").

According to the letter, while FINRA claims that the collection of standardized data for CARDS will enhance investor protection, using the data to assess broker and investor activity and then providing report cards to firms "will likely result in FINRA staffers' judgments increasingly determining how money is invested." The letter further commented that FINRA's increased influence over how customer money is invested is "troubling," particularly in light of a working paper released by the Mercatus Center that demonstrates "FINRA's lack of accountability."

Overall, the letter stated that although CARDS is "well-intentioned," it will ultimately "impair investors' ability to make decisions regarding their own financial portfolios without monitoring and micromanagement from FINRA." The letter urged FINRA to reconsider its proposal.

Lofchie Comment: The most significant question raised by the CARDS proposal concerns the appropriate level of governmental (or SRO) oversight of financial activities. Even if providing FINRA with access to all of the information it wants, and even if such information would really make for marginally better regulation, is there no point at which the degree of governmental oversight becomes intrusive and excessive? The power of oversight unquestionably alters the investment opportunities that firms will offer (or sell), likely making them more conservative, and probably less diversified (after all, at the margin, why take the risk of selling a product that may make FINRA uncomfortable?). Or more generally, is it a good result to create a system that would be more disinclined to innovations or risks? There are reasonable arguments to be made on both sides of that question. The second most significant question (or maybe it should be the first as a practical matter) is, would the data really be safe? Given the current state of cybersecurity (hackers now seem to have the edge), the implementation of CARDS seems to be a potentially dangerous development; it's a lot of information gathered in one place, even if that information is not immediately traceable to individual customers.

See: Letter to Office of Corporate Secretary, submitted by Hester Peirce and Kristine Johnson. Related news: SIFMA Survey Finds That Investors Are Opposed to FINRA's CARDS Proposal (with Lofchie Comment) (December 15, 2014); ACLU Submits Comment Letter on FINRA CARDS Proposal (with Lofchie Comment) (December 5, 2014); SIFMA Expresses Serious Concerns Regarding FINRA CARDS Rule Proposal (December 1, 2014); Congressman Garrett Issues Statement Questioning Need for FINRA CARDS Proposal (October 15, 2014); FINRA Requests Comment on Rule Proposal to Implement CARDS (FINRA Reg. Notice 14-37) (with Lofchie Comment) (September 30, 2014).