FINRA Requests Comment on Rule Proposal to Implement CARDS (FINRA Reg. Notice 14-37) (with Lofchie Comment)

FINRA issued a regulatory notice requesting comment on a proposed rule to implement the Comprehensive Automated Risk Data System ("CARDS"). Initially, FINRA released CARDS as a concept proposal in Regulatory Notice 13-42. CARDS is intended to enhance investor protection and ensure market integrity by allowing FINRA to identify and quickly respond to high-risk areas and suspicious activities not identified through its current surveillance and examination programs. The proposed rule reflects comments received on the concept proposal.

According to FINRA, the rule proposal would be implemented in phases and would exclude the collection of personally identifiable information from customers. The first phase would require around 200 carrying or clearing firms to submit periodically in an automated, standardized format, specific information that is part of the firms' books and records relating to their securities accounts and the securities accounts for which they clear. The second phase would require fully disclosed introducing firms to submit the specified account profile-related data elements either directly to FINRA or through a third party.

Lofchie Comment: The goal of the rule seems to be the complete transparency for regulators of every account held by a U.S. broker-dealer. The opening line of the FINRA rule proposal confirms this: "Each carrying or clearing member shall submit in such automated format as FINRA may require, prescribed data relating to all the member's securities accounts, to the extent the data is part of the member's books and records." The ultimate goal appears to be that FINRA become a central depository for records of every activity conducted at every securities firm. This task seems monumental and raises interesting philosophical questions about so much information being collected in one entity (FINRA), its duties with respect to the protection and use of that information, and the exercise of societal control over that information considering the fact that FINRA is not a governmental entity but a self-regulatory organization. Regarding the use of the information: is it to be used to monitor brokers' conduct, investors' trading activity or suspicious transactions? Will the information be freely available to all U.S. regulators? Will the information be available to private litigants?

See: FINRA Regulatory Notice 14-37; Text of the Proposed Rule.