FINRA May Collect Massive Amounts of Confidential Customer Data in the Future

By Tanner Forman

FINRA has proposed the creation of a new form of market regulation known as the Comprehensive Automated Risk Data System (“CARDS”).  If the system is created, FINRA would be allowed to mine massive amounts of client data from investment firms in hopes of using that data to better protect investors and to detect and fight risks that could cripple firms and the market.  A FINRA regulatory notice published in December of 2013 provides, “the CARDS system would download customer trade data from clearing firms and analyze it to identify churning, pump-and-dump schemes, excessive markups and mutual fund switching.”  FINRA believes that the system would help it deter both investment firms and brokers from engaging in questionable behavior.

However, not everyone shares FINRA’s same enthusiasm for the CARDS system.  The brokerage industry is hoping to convince FINRA that the system would cause too many privacy concerns.  What the brokerage industry isn’t saying is that the industry is opposed to the system because the increased oversight could uncover broker misconduct and could harm the investment firms’ overall profits.

Some investors are also opposed to the creation of the CARDS system because of the system’s apparent resemblance to the data collection process of the National Security Administration.  In particular, investors are concerned with the idea of FINRA possessing large amounts of sensitive data.  If there was a breach in the security of the database, a hacker could have access to highly confidential customer financial information, including holdings and transactions.  Unauthorized access to that information could cause serious damage to individual customers and to the overall confidence in the stock market.

At this point, CARDS is only a concept and not a formal rule proposal.  FINRA solicited comments on the CARDS system with the deadline to comment expiring on March 21, 2013.  It will be interesting to see whether FINRA creates the CARDS system and whether the system’s higher risk will lead to higher returns in regard to market regulation.