After the commentary period ended in March, organizations that will be directly affected by the US Financial Industry Regulation Authority’s (FINRA) proposal to gather heaps of customer account information are left wondering whether FINRA will heed the industry’s feedback. Firms (including broker-dealers) introducing brokers and clearing brokers continue to express their concerns over the security, privacy and data management issues that the regulation CARDS (short for Comprehensive Automated Risk Data System) presents. In this period of uncertainty, it would serve advisors and broker-dealers well to begin preparations for the first phase of CARDS, which is slated to begin in 2015.
No matter the outcome of the FINRA CARDS initiative, brokerage firms and technology and data management specialists must be ready. Even though the exact regulations and rules FINRA will enforce are still up in the air, it is imperative for financial organizations to start preparing now in order to be successful next year. Starting from ground zero once the regulations are released will only lead to frustration and increased difficulty in achieving compliance.
In order to avoid sales practice misconduct as defined by FINRA, advisors and broker-dealers should put a plan in place using basic data management techniques.
Where CARDS Can Go Wrong
Collecting a myriad of data from firms can cause possible data overload and errors, thus generating intensified exams and excessive additional questions for FINRA. This would result in unnecessary additional time and cost spent in worthless fishing during the exams with no outcome for the regulator.
The solution to this potential mishap would be for brokerages to optionally send client information either straight to FINRA or through a service bureau, rather than only through clearing brokers, as was originally proposed by FINRA. It is helpful to know that in the first stage of CARDS, accounts in non-cleared products would not fall under the investor account reporting requirements.
But, everything is not rainbows and butterflies for broker-dealers. The full range of data mandatory by CARDS is expected to be warehoused in several systems. Though most will be found in transaction recordkeeping systems, risk profiles may be kept in a separate customer relationship management platforms, a paper-based file cabinet or the files of a completely different firm.
This presents the issue of data standardization for reporting, which is a huge task considering the number of firms that will have to accumulate and send data to FINRA.
Where the Risk Lies
Customer suitability information, investment risk, liquidity requirements and client profiles are all reproduced differently, using value ranges and codes that are not alike depending on the introducing broker. Though FINRA recently promised more flexibility in reporting, it will be challenging to guarantee the suitability of information will be interpreted in the same manner throughout all brokerage firms. In the case of account information on non-cleared trades, which are exempt in the preliminary phase of CARDS, it would be also helpful to begin thinking ahead with the consideration that reporting will likely become mandatory in the not too distant future.
Another risk in under or non-reported data lies in the case of account forms that have been scanned into systems as PDFs rather than readable, malleable data. In this case, the information cannot be easily read as an electronic form, and it would take a large amount of tedious, time-consuming work to extract the data for reporting. Although FINRA may not enforce this action, firms should still change their workflows to get transaction records into electronic formats.
So, What Should Broker-Dealers Do Now?
Getting data in order should be the number one priority for brokerage firms at this time. Regardless of the fact that explicit CARDS requirements have not yet been revealed, there is much that broker-dealers can do ahead of time to prevent a mass rush for compliance down the line.
- Implement data capture standards. When client data is initially captured, it is important to ensure all the correct information is being collected to prevent error and NIGO. With electronic data capture, brokerage firms can easily discern if they have what they need and if any discrepancies are present.
- Unify how data is defined. Without data definition standards, there is no way to effectively store or sort through client information for even the most simple reports. By standardizing data values, broker-dealers will gain a much more realistic and accurate picture of client assents.
- Clean up existing systems. Although firms may not be required to re-input data from previously scanned forms that don’t map to their electronic database, it is very worthwhile to evaluate the existing electronic books and records system to identify and eliminate any errors that exist. Firms that do this will have a huge leg up on CARDS.
While anticipating the implications CARDS will have for firm workflow and processes, brokerages should get their data in order now.
Scott Gillespie is a Senior Consultant at Quadron Data Solutions. He is also the Managing Partner of TransAd Partners LLC, the consultancy affiliate of Fetter Logic, Inc.
