Small firms have little to fear regarding the implementation costs around FINRA’s new Comprehensive Automated Risk Data System (CARDS) initiative, according to Hardeep Walia, co-founder and CEO of Motif Investing.
“For smaller b/ds, when you factor in the entire [regulatory] process, there’s a lot of good that can come from this,” he said in an interview Monday. While CARDS is not yet deployed, Walia’s firm is one of several pilot firms gathering data for the regulator. The proposal would allow FINRA to collect data on accounts, trading activities and individual clients on a regular basis to identify potential conflicts.
Walia noted that at Motif, the cost of implementing systems to collect the information for CARDS in recent months has been minimal and expects the costs to other small broker/dealers will be “incremental.” For some, the costs associated with compliance and examination may even go down, he said during an interview on CNBC’s FastMoney. “Using technology brings down the costs and allows us to engage under this new and novel model in ways that are very hard to do while interpreting the current rules base."
It’s more time-consuming for firms when FINRA does its examinations, Walia says in comparison to the CARDS system. “I’d rather give them the data,” he told CNBC’s FastMoney. Walia also pointed out that the CARDS initiative could also help solve the over-abundance of regulations that firms have to absorb. “Most people can’t consume the amount of rules out there,” he says. “We’re in a rule-writing cycle that never ends.”
“It will allow us to see concentrations, speculative stocks, be able to react where there might be an incident of fraud going on or a serious sales practice violation,” FINRA’s CEO Rick Ketchum said on the show, calling the initiative a combination of man and machine. “It’s the regulator’s lament is getting there too late after investors have already been harmed.”
“I can see the potential of what CARDS will do,” Walia says, noting that everyone wants smarter regulation and this is one way to do that. But he does note that there are valid concerns with the initiative, noting that he’s advocating for a gradual process for rulemaking around how the data collected by the CARDS system is used.
FINRA released the latest regulatory notice on the CARDS proposal late last month, saying it planned to roll out the initiative in phases. The first phase of CARDS will require about 200 clearing firms to periodically submit trading information.
FINRA estimates this first phase will cost $12 million to develop over a 3-year period. Clearing firms may have to spend up to $8 million to develop the systems needed to transmit the required data, as well as pay up to $2.4 million in annual mainenance costs.
The second phase of the CARDS initiative would require brokerage firms to submit the specified client account information either directly to FINRA or through a third party, according to the notice. As previously released, FINRA says it will not be collecting customers’ personally identifiable information, including account names, account addresses and Social Security numbers.
The cost of this second phase is still being examined. FINRA is actively seeking data and quantified comments where possible. The comment period expires on Dec. 1, 2014.