Finra CEO Pumps The Breaks On Massive Data-Collection Proposal

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Brokerdealer.com blog profiles Finra CEO’s, Rich Ketchum, decision to stop working on the proposal for a massive data-collection system with concerns over secruity issues. Ketchum is expected to report to Congress tomorrow, Friday, May 1, 2015, to explain why. Since the proposal’s start it has received much resistance by others in the industry due to fear of putting the clients and risk and seems Finra is now starting to agree. This brokerdealer.com blog update is courtesy of InvestmentNews’ Mark Schoeff Jr.  and his article, “Finra CEO Rick Ketchum backs off data collection plan“, with an excerpt below.

Finra is putting the brakes on its proposal for a massive data-collection system over concerns about the security of customer information, the organization’s chief executive is expected to tell Congress on Friday.

The Financial Industry Regulatory Authority Inc. has received strong industry resistance to its so-called Comprehensive Automated Risk Data System over its potential costs and the possibility that it will expose customer data to hackers. The comment period for the proposal ended on Dec. 1 last year.

In prepared testimony, Finra chief executive Rick Ketchum said that although CARDS will not collect client names, addresses and Social Security numbers, Finra shares concerns about “bad actors” being able to obtain information that “could possibly be reengineered to identify individuals.”

The regulator is studying the potential data-security threats, Mr. Ketchum will tell the House Financial Services Committee, and is evaluating whether CARDS data can be collected through “existing data sources.”

To continue reading about what Ketchum is expected to tell Congress tomorrow, click here.

BrokerDealers Battle Their Own Regulator: Sifma v. Finra Over Privacy

iStock_000010356316XSmallBrokerdealer.com blog update courtesy of The New York Times’ Susan Antilla.

Finra has proposed a new plan that requires brokerdealers to share extensive information about their clients’ accounts and brokerdealers are not happy about it.

The proposal by the Financial Industry Regulatory Authority, or Finra, is “a troubling and serious threat to investors’ civil liberties and constitutional rights,” Carrie L. Chelko, chief counsel of the Philadelphia financial firm Lincoln Financial Network, wrote in one of hundreds of letters to the agency criticizing the plan.

Finra argues that regular, monthly reports from brokers detailing purchases, sales, margin calls and risk profiles will give it a chance to stop abusive practices before further harm is done.

Finra is considering the feedback on its plan, called the Comprehensive Automated Risk Data System, or Cards, and making changes in advance of seeking approval from its board of governors and forwarding a proposal to the Securities and Exchange Commission, Finra’s chief executive, Richard G. Ketchum, said in a telephone interview.

Finra has often been dismissed as an apologist for the Wall Street firms that finance it, but it has made some efforts since the financial crisis to play a tougher role. It fought the discount brokerage firm Charles Schwab & Company in 2012 after the firm tried to force customers to waive their rights to bring class-action lawsuits, winning its case last April. It also strengthened its standards for brokers who are making investment recommendations, advising them that a product must be consistent with a customer’s best interest. Several powerful investor advocacy groups, includingAARP and the Consumer Federation of America, have applauded Finra’s plan, noting that it would allow agency regulators to match the 21st-century data capabilities of the Wall Street firms it regulates. But the brokerage firms that pay Finra to be their regulator say that keeping so much investor information in one place is an example of regulatory overreach and an invasion of customers’ privacy.

“Not a week goes by without some data breach being reported in the press,” Ira D. Hammerman, general counsel of the Securities Industry and Financial Markets Association, a Wall Street lobbying group known as Sifma, said in an email response to questions about Finra’s plan. “And if Cards is built, the question is when, not if, there will be a data breach.”

In December, the American Civil Liberties Union wrote to Finra to express its “very serious security and privacy concerns” about Cards.

Mr. Hammerman and other critics have said that Finra’s plan would invade investors’ privacy, put personal information at risk, take supervisory authority away from brokerage firms and put small brokers out of business. After Sony disclosed in December that its systems had been hacked, Mr. Hammerman even took the opportunity during a media interview to liken Sony’s predicament to the risks that Cards would pose.

Barbara Roper, director of investor protection at the Consumer Federation of America, said Wall Street was “using every tool in their toolbox.” She added, “Their reaction is so over the top that the only thing I can see is that they just don’t want their regulator to be able to keep an eye on them.”

Given Finra’s reputation among some critics, Ms. Roper said, the aggressive Cards proposal has taken some Wall Streeters by surprise. “The industry sees this as evidence of Finra becoming less of a lap dog,” she said.

Mr. Ketchum said that the proposal would make it possible for Finra to spot patterns that suggest bad behavior by a brokerage firm, a branch office or an individual broker.

Dishonest brokers do not usually take advantage of only one client, Mr. Ketchum said. Instead, “they fall in love with a product or they fall in love with a strategy and they put tons of people in it.” Thus, a comprehensive database that displays all of the activity at a firm or branch can help Finra zero in on abuse, he said.

Ms. Roper said the program would let Finra jump on problems more quickly. “It creates a real deterrent,” she said. “Who’s going to churn an account if it immediately sends off a warning siren at Finra?”

In objecting to Cards, the securities industry has been most vocal about the potential for a vast repository of investor information to be hacked. After perusing the data security objections raised in a first round of comment letters in early 2014, Finra revised its proposal and said that customers’ names, addresses and tax identification numbers would not be included.

To continue reading this article from the New York Times, click here.