FINRA: New CARDS Does Little to Ease Data Collection Concerns

The Financial Industry Regulatory Authority (FINRA) may think that putting new CARDS on the table will help clearing and introducing brokers comply, but they are still not too happy about the hand they’ve been dealt.

Granted, in its new version of the so-called CARDS initiative, FINRA has bowed to industry demands with some changes to its initial proposal, first unveiled in December 2013.  The self-regulatory agency for securities firms insists it is eager to work out any kinks in the data collection and mapping process with correspondent clearing, self-clearing and introducing brokers before CARDS is launched. Comments on the new incarnation are due by December 1.

FINRA contends it needs the account, transaction and customer profile data to ensure that broker-dealers are selling the correct products to the correct customers. By receiving the data in standardized formats through the Comprehensive Automated Risk Data System, or CARDS for short, the agency can mine it faster to find which broker-dealers are at the highest risk for violating customer suitability rules and for which product lines.

Getting a Whiff

But finding and formatting account and transaction data is still causing clearing brokers some angst, they tell FinOps Report. In a presentation made to members of the Security Traders Association (STA) during a conference call on Wednesday afternoon, FINRA reportedly indicated that the agency is steadfast about its informational requirements. “Did you get a whiff of all the data FINRA still wants,” griped one operations manager at a correspondent clearing firm who called FinOps. His stance was echoed by five operations specialists at other clearing firms who listened to the same call.

Introducing brokers are just that: brokers who buy and sell securities for their own customers. They will outsource the back-office work of keeping books and records to correspondent clearing brokers. Some large brokerages, which self-clear, handle all of their books and records in-house. While those books and records supposedly hold the account and transaction data, the customer profile information — investor time horizons, objectives, risk tolerance and net worth — is held by the introducing brokers.

Here is the gist of what Mike Ruffino, FINRA’s head of member regulation for sales practice who offered the high-level presentation on the CARDS program, had to say, according to FinOps sources. FINRA has been working with 11 correspondent clearing, self-clearing and introducing brokers in a pilot program to ensure that the data could be formatted, transmitted and received by FINRA correctly. The CARDS program isn’t meant to unduly burden FINRA registered firms. By standardizing the types of information in specific data formats, FINRA can more easily digest the critical data and tweak individual exams accordingly. Even better, it might reduce the number of firms it reviews in a sweep exam, and even recycle the data into some type of report card.

Nothing New

The consensus from listeners: FINRA’s presentation on the STA-hosted conference call was a polished sales pitch. “I heard nothing new. They just wanted to show they cared,” said one operations executive. Said another: “The concessions will certainly help ease the pain, but we will still have a lot of pain and no clear sense of the gain.” At issue: can FINRA really mine the data correctly or will the CARDS program actually result in FINRA calling on registered firms a lot more frequently?

The STA conference call followed FINRA’s publication of the amended version of its proposed CARDS data gathering program. It did make some concessions after several hundred respondents heaped plenty of criticism on its initial concept release. In summarizing the new CARDS, Ruffino reportedly detailed three critical changes in the new proposal. First, customer profiles would not include any information identifying a particular customer. Second, any information FINRA wanted could be delivered monthly, not daily. Last but not least, FINRA will take a two-phased approach with an estimated 200 correspondent clearing and self-clearing firms sending in the account and transaction data first. Later, about 1,850 introducing broker-dealers would send customer profile data. If they are not able to send the information directly to FINRA, they can rely on third-party firms to handle the transmission.

Putting the burden of filing customer profile data on introducing brokers or self-clearing brokers relieves correspondent clearing brokers, who typically don’t store it. Of course, the introducing brokers are not necessarily able to provide that information to FINRA with ease. They might have that customer risk profile information in paper-based file cabinets or not at all.

No question, the reams of account data and transactional data FINRA wants will be costly to track down for all involved. Sources declined to offer any cost estimates to FinOps, or specify which types of transactional or account data might be hard to find. Even speaking on condition of anonymity, one operations executive at a correspondent clearing broker declined to discuss details, saying, “it wouldn’t make us look good.” Yet another clearing specialist added, “Let’s just say we are doing some mapping right now and will be speaking to FINRA about our pain points. Neither would disclose whether their firms were participating in FINRA’s pilot program for CARDS.

During the conference call, Ruffino reportedly would not divulge the names of any testers, other than to say the group represented a cross-section of the industry. When asked about any lessons learned during the pilot test, he would only say that FINRA was working closely with the test group to collect their feedback and come up with a balanced approach.

Finding Data Only Half the Battle

But one data formatting specialist worries there is plenty which can go amiss. Even if all of the information can be found, retrieving and reformatting it to ship to FINRA could be difficult. “Back-office systems can natively export account profiles, balance, positions and transactions, but not ACATS and non-ACATS data or stock-record related data,” explains Scott Gillespie, senior consultant at Denver’s Quadron Data Solutions, a data aggregation platform provider. “FINRA also wants information on account deposits and withdrawals and internal transfers, which will require specialized extraction and mapping rules.”

ACATS refers to a system operated by the US clearing and settlement infrastructure Depository Trust & Clearing Corp. (DTCC) which enables financial firms to transfer customer records from one firm to another when a customer jumps ship. Stock-record data represents the value of the securities held by the introducing broker in a particular stock in a particular day.

Whether or not CARDS’ data formats offer any efficiencies in reporting, operations executives at two correspondent clearing firms who spoke with FinOps say they are still worried about the costs of labor. “W e’re going through ongoing talks with our IT peers and customers about how we can pull it off and for how much,” says one operations manager at a correspondent clearing firm. The wildcard: whether they will pass on the costs to introducing brokers as additional fees or will simply absorb the extra expense as the cost of doing business.

FINRA has come up with some initial figures on the cost to correspondent and self-clearing firms based on their survey of a “limited group” of firms. The estimates range from US$390,000 to US$8.33 million for the initial technology infrastructure. Annual maintenance: US$76,000 to US$2.44 million. Given the extreme range of figures, technologists tell FinOps they are not certain that FINRA’s economists have correctly pegged the expense. Even FINRA acknowledges that the figures are preliminary and could well end up being far higher by the time FINRA’s final proposal is unveiled.

Perhaps the best news is that correspondent clearing brokers, self-clearing brokers and introducing brokers have until December 1 to comment on FINRA’s modified request for comment. Even if FINRA doesn’t reduced its demands for data elements, financial firms will likely have until 2016 before they must comply.

Still, speaking up now may be their best shot for getting more concessions. FINRA says it wants to know what firms have to say. If the last request for comment is any indication, they’re going to hear plenty.