February 4, 2015

Letter to FINRA on the Rule Proposal to Implement the Comprehensive Automated Risk Data System

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February 4, 2015 

Marcia E. Asquith 
Office of the Corporate Secretary
FINRA 
1735 K Street NW Washington, DC 20006-1506 

Dear Ms. Asquith: 

We appreciate the opportunity to comment on the Rule Proposal to Implement the Comprehensive Automated Risk Data System issued by the Financial Industry Regulatory Authority (FINRA).1 The Mercatus Center at George Mason University is dedicated to bridging the gap between academic ideas and real-world problems and advancing knowledge about the effects of regulation on society. This comment, which reiterates concerns laid out in the attached opinion piece, does not represent the views of any particular affected party or special interest group but is designed to assist FINRA as it considers implementing the Comprehensive Automated Risk Data System (CARDS). 

FINRA claims that collecting and storing standardized data with CARDS will enhance investor protection. However, using the data to assess broker and investor activity and then providing report cards to firms will likely result in FINRA staffers’ judgments increasingly determining how money is invested. FINRA metrics for grading firms will drive firm conduct, but standardized metrics may not produce the best results for investors. FINRA’s expanding influence over how customer money is invested is especially troubling in light of a new working paper released by the Mercatus Center at George Mason University demonstrating FINRA’s lack of accountability.2 

Despite FINRA’s decision that CARDS will not include personally identifiable information, a central database of account holder information and activity will be a likely target for hackers who could piece together information and determine an identity. An even greater cost, however, is the breach of Americans’ privacy, as detailed in a comment letter by the American Civil Liberties Union.3 Investors have an interest in their account activities not being monitored. 

FINRA believes it is responding to a demand from investors for more protection. However, the investor survey released in November, showing that investors support additional regulatory protection, asked questions that were too vague to form the impetus for moving forward with CARDS.4 Asked differently, the questions likely would have yielded very different results. For example, in an investor survey by a brokerage industry trade group, more than 70 percent of respondents aligned with the statement that “the risks of FINRA’s proposal outweigh the benefits, even if the data is kept anonymous,” owing to the security threat posed by CARDS.5 

Although well-intentioned, CARDS will impair investors’ ability to make decisions regarding their own financial portfolios without monitoring and micromanagement from FINRA. Combined with security and privacy concerns, the real costs to investors should prompt FINRA to reconsider its proposal. 

Sincerely, 

Hester Peirce 
Senior Research Fellow 
Financial Markets Working Group 
Mercatus Center at George Mason University 

Kristine Johnson 
MA Fellow 
Mercatus Center at George Mason University

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