FINRA Signals Controversial CARDS Plan May Be Unneeded

(Bloomberg) – FINRA is weighing whether to drop a plan for a trade-surveillance system that has drawn sharp opposition from the brokers that fund the agency.

The regulator has described the new system as critical for modernizing how it oversees more than 4,000 securities firms and 630,000 brokers across the country. It was meant to automate FINRA’s review of suspicious activity such as overcharging clients, excessive trading and pump-and-dump schemes.

Brokers have said the proposed system, known as CARDS, would be vulnerable to hackers and that it would create huge new costs for them. FINRA is now mulling whether it can do its job without the database, FINRA Chief Executive Officer Richard Ketchum said in remarks prepared for testimony before the House Financial Services Committee on Friday.

FINRA is “reviewing the feasibility of meeting the important goal of enhancing our early warning capability regarding fraud and investor abuse using existing data sources,” Ketchum said in his statement.

FINRA agreed last year to back away from collecting customers’ personal information. Brokers have continued to lobby against the system, though, arguing the data would still be valuable to hackers.

FINRA is also competing with bidders to build the Consolidated Audit Trail, a massive database that will eventually receive data on every trade, order or message sent by brokers buying and selling stocks and options. The SEC approved creation of the audit trail after the May 6, 2010, stock rout known as the flash crash, when more than $862 billion in U.S. equity value vanished before prices recovered.

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