Securities Litigation

On September 30th, the Financial Industry Regulatory Authority (FINRA) announced a proposed rule that would implement the controversial Comprehensive Automated Risk Data System (CARDS). Under the proposed rule, FINRA seeks to implement automated data gathering from clearing firms and brokerages in a two-phase approach. The proposal seeks to take advantage of "technological advances [that] can be leveraged to obtain, store, manage and access large quantities of data to identify and quickly respond to potentially fraudulent and abusive behavior." In the first phase, "CARDS would limit the collection of information to only that data that resides at carrying or clearing firms," including "information relating to securities and account transactions, holdings, account profile information . . . and securities reference data for all securities accounts." The first phase would affect approximately 200 clearing firms. In the second phase, CARDS would expand its data acquisition to fully-disclosed introducing firms, thus impacting approximately 1,850 brokerages. Importantly, and in response to concerns over the program's initial proposal, the data acquisition will not include any of the account-holders' personally identifiable information (PII). The new rule would impose significant regulatory costs on brokerages and clearing firms. Under phase one, the carrying and clearing firms would need to develop some process to submit the required data, including costs relating to gathering the data and ensuring quality control. Further, under phase two, and unless the firms contract with third-parties to handle the rule's requirements, fully-disclosed introducing firms would incur similar costs to implement methods for submitting the required data. Based on initial calculations, FINRA anticipates that the cost of developing these systems would range from $390,000 to $8.33 million and that the annual cost for maintaining the systems would range from $76,000 to $2.44 million. The proposal is already inciting activity in the financial industry. As one example, the Financial Services Institute has formed a task force to formulate that group's response to the proposal. Among the concerns to be addressed by the Institute and other groups are details relating to data security and regulatory costs. The Institute, along with any other persons or groups wishing to submit responses, has until December 1st to reply to the proposal's request for comments. Sources: http://www.investmentnews.com/article/20140930/FREE/140939995/finra-proposes-cards-rule-marking-next-step-in-long-journey-of http://www.investmentnews.com/article/20141002/FREE/141009976/fsi-sets-up-task-force-to-influence-cards-development# For the FINRA proposal released on September 30th, click here. For the text of the proposed rule, click here.