Comprehensive Automated Risk Data System – CARDS – A Sweeping New FINRA Surveillance Program

FINRA requests comment on a proposal to institute a sweeping new surveillance program – the Comprehensive Automated Risk Data System or CARDS. FINRA believes this program enhances their suite of regulatory programs, further protects investors and aids in restoring investor confidence in the securities industry. In FINRA’s view, CARDS is the “next step” in evolving technology; to collect metadata about each and every investor with a brokerage account in the United States in order to “identify and quickly respond” to potential malfeasance in the treatment of the investor’s account. Comment period ends December 1, 2014.

FINRA believes these as additional benefits to CARDS:

The broker-dealer’s business profile incorporated into FINRA’s surveillance program
Insight into a broker-dealer’s holistic product mix and any changes
Ability to monitor broker-dealer’s sales activities related to high risk investment and investor’s suitability profiles
Identify trends in broker-dealer’s sales activities indicative of wrongdoing in the market place by an investor or registered representative
View into a broker-dealer’s risk profile and identification of situations in which the risk profile is violated
Specific monitoring related to the broker-dealer’s anti-money laundering programs
Exchange of information between the broker-dealer and FINRA provides for a more robust compliance program that benefits both the broker-dealer and FINRA
Lower cost and compliance burden on broker-dealers through a reduced number of FINRA information requests
The Concept

FINRA proposes a requirement for self-clearing and carrying firms to submit specific information related to each and every account the broker-dealer carries on its books and records. This includes investor, institutional, broker-dealer and proprietary accounts. FINRA proposes a standardization of the data collected and requirements that broker-dealers submit the data to a new FINRA facility on an automated basis. The extensive list of reportable data follows:

Securities Transactions
Purchase and Sales
Dividend reinvestment
Account Transactions
ACATS Transfer summary and detail
Non-ACATS Transfer summary
Non-ACATS Transfer detail
Internal securities transfers (journals) summary
Internal securities transfer (journals) detail
Account additions and withdrawals (funds)
Margin Calls
Holdings
Stock Record detail by security
Stock Record summary by security
Allocation Pair-Off detail by security
Allocation Pair-Off summary by category
Allocation Category summary by category
Securities account balance (aggregate value of holdings, balances and equity in investor accounts)
Account Profiles
Securities Account (classification, registration, including account number and margin eligibility)
Securities Account Participant (type of entity associated with the account, i.e. natural person, corporation)
Securities Account Servicing Representative (registered representative)
Security Account Suitability
Securities Reference Data
Security Reference (information detailed in the CARDS Data Segments defined in the CARDS Data Specifications)
Allocation Category
Allocation Pair-Off Hierarchy
Phased Approach- Phase One

FINRA proposes to implement CARDS in two (2) phases. The first phase includes submission of information housed on the carrying or clearing firm’s books and records. Because certain broker-dealer’s customer suitability information may not reside on the clearing firm’s books and records, FINRA offers a carve-out from the requirement to submit certain Account Profile data. In other words, clearing firms need not submit the data elements listed below on accounts it carries on a “fully-disclosed or omnibus basis:”

Investment time horizon
Investment objective
Risk tolerance
Net Worth
Servicing representative compensation allocation
Servicing representative identifier
Serviced-By representative group flag
Branch CRD number
Registered representative CRD number
Self-Directed account flag
Birth year
Account participant related to employee flag
Control person for public company flag
Account participant politically exposed person flag, and
Account participant related to employee of another broker-dealer flag Clearing and carrying broker-dealers are required to report the above information for all other accounts carried on its books and records, e.g. accounts that belong to that broker-dealer.
Phased Approach – Phase Two

The second phase brings in submission of data from broker-dealers that introduce accounts to a clearing firm on a fully-disclosed or omnibus basis. The introducing firm’s data (see list above under Phase One) submission completes the Account Profile within FINRA’s CARDS system. Clearing firms, subject to a written agreements, is permitted to report this information on behalf of the introducing broker-dealers.

Exclusions

If the broker-dealer does not hold, custody, or execute transactions on the products listed below, any reporting on these product is excluded or exempt:

Variable annuities
Private placements
Direct participation programs
Private investments in public equity (PIPEs)
Non-traded REITS
Unregistered securities
Precious metals
Direct mutual funds FINRA indicates additional rulemaking is forthcoming to require the reporting of information related to the above products in the future.
Frequency of Submissions

The delivery of the information described in this summary is required monthly (both phases) by the tenth (10th) business day of the following calendar month. The transaction data, which occurs on a daily basis must be submitted with daily granularity. The holdings and account profile data must be submitted as a “single monthly snapshot” as of the last business day of the month. Security reference data is required as it relates to all of the securities “referenced” in the submission for the entire month. FINRA will offer the option to broker-dealers to submit data more frequently if desired. Finally, the retention requirement for this data is to maintain and preserve a copy of the data transmitted for a period of not less than three (3) months. Once FINRA receives the data, their systems perform automated validations and return the results of such validations to broker-dealers. If an error occurs, the broker-dealer is allowed seven (7) business days after receipt of notification of the error from FINRA to submit a correction.

Data Standards

In developing the CARDS system, FINRA intends to address industry concerns regarding the lack of common data context standards. FINRA will provide broker-dealers a mechanism to report suitability data, product and security descriptions in a free format text field manner. To alleviate the technology burden on broker-dealers unequipped with sophisticated technology resources FINRA intends to provide fully-disclosed firms a web-based interface, a data upload feature and machine-to-machine reporting capability

Onboarding and Testing

Based on the example of OATS, FINRA plans to build an independent testing environment for CARDS. Prior to transmitting to CARDS production, broker-dealers will successfully transmit information to the CARDS test environment. Additional administrative requirements include registration of the broker-dealers to establish firm contacts, establish user accounts and specify whether the broker-dealer chooses to self-report or use a third-party.

Implementation

Nine (9) months after SEC approval is the effective date for Phase One, with Phase Two effective within fifteen (15) months of SEC approval. A potential pain point for broker-dealers is a provision in the proposal that broker-dealers report “historical” purchase and sales information for the period between the date of SEC approval and when the broker-dealer began submissions. FINRA wants to be in the position to run their analytics as soon as CARDS becomes operational. This means that broker-dealers will need their systems ready by SEC approval date instead of effective date to store the required purchase and sales data and detail.

Additional Information and Details

Comment period ends December 1, 2014.

To view the Request for Comment go here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p600964.pdf

To view the Rule Proposal go here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/industry/p600920.pdf

Massive amount of information related to data, record layouts, etc. on the FINRA CARDS website:

http://www.finra.org/Industry/Compliance/RegulatoryFilings/CARDS/index.htm

The Document Summary contains 38 documents that detail the submission layouts. The Data Dictionary defines over 200 data element names and over 29 different documented Reporting Scenarios where one or more of the 200 data elements are included in the reporting.

Some Things to Think About Within Your Firm

Review FINRA documents against systems to address any deficiencies for required reporting data
Review technology platforms to insure functionality that allows for the capture, storage and reporting the data elements as required
Review procedures to make sure required data is captured going forward
Review and update procedures for error handling
Assess staffing levels to insure sufficient compliance support for CARDS reporting
Verus Consulting Can Help

Verus Consulting has the expertise and experience to assist your firm in the analysis and review of the CARDS proposal in relation to your books, records and systems. We can also build procedures for ongoing support and monitoring of CARDS. Please email us at This email address is being protected from spambots. You need JavaScript enabled to view it.”>info@verusconsulting.jlwhost.com or call us at 855-968-3787 if you need additional information or if we can assist you.

20 November 2014

Verus Consulting Group LLC
999 Vanderbilt Beach Road
Suite 200
Naples, FL 34108
www.verusconsulting.net

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