March 18, 2009
I am an attorney located in San Antonio, Texas, who primarily represents claimants in FINRA cases. In addition, I am a FINRA arbitrator. I have read the text of the proposed changes to the Discovery Guide, and although some of the proposals seem well intentioned, many of the proposed changes will cause further problems in the FINRA arbitration process.
First, I am disturbed by what seems to be a shifting of the spirit of the Discovery Guide. The customer is "forced" into mandatory FINRA arbitration, where the rules have always been that the associated person must KNOW THE CUSTOMER, yet the proposed rules seem to be shifting toward providing much more information about the customer during the arbitration process and not at the time that KNOWING THE CUSTOMER was relevant. This sends the wrong message to customers, who currently do not have a choice as to court or arbitration.
Secondly, broker-dealers should, at a minimum, voluntarily
provide any documents to customers that are part of the FINRA "New and Amended Recordkeeping Requirements Checklist" published by FINRA in 2003 in response to the October 26, 2001 amendments to Rules 17a-3 and 17a-4 of the Securities and Exchange Act of 1934. All the documents listed in that checklist are required by the SEC to be kept and retained by broker-dealers. Why should not the customer be able to obtain the same records that are readily available?
Third, List 2 of the proposed rules require that the customer provide more records and for longer time periods than the previous rules. For instance, federal income tax returns and financial statements must be provided by the customer for five years prior to the first transaction at issue. The current lookback period is three years prior to the first transaction at issue. This a potential discouragement to customers who are currently forced into an arbitration system. In addition, List 2 currently limits the federal income tax return to pages 1 and 2 of Form 1040 and Schedules B, D, and E. All essential information regarding investments should be gleaned from those applicable sections. To allow the broker-dealer to obtain the full federal income tax return will intrude on the right of privacy of customers, again sending the wrong signal that FINRA arbitration is a fair and equitable process.
Fourth, full commission runs should be required in every case. For unsuitability cases, where a broker routinely marks tickets unsolicited, the customer should be able to review the full commission runs to see if the broker was doing the same thing for other customers. Whether or not the broker engaged in other trades in the same security for other customers on the same day, and whether it was marked solicited or unsolicited, are major factors in unauthorized trading, yet the proposed Discovery Guide does not require the full commission runs.
Fifth, allowing the broker dealer to "redact" other customer names does not pass the smell test. Allowing the broker-dealer to perpetuate the same fraud on investors one at a time does not instill public confidence in the system in a system where the customer has no choice but to arbitrate at FINRA.
Sixth, exception reports, supervisory activity reviews, activity concentration reports, active account runs and similar documents produced to review for activity in customer accounts should clearly apply to the associated person---not just for the particular customer's account. Again, this assists in the perpetration of massive frauds because the same fraud is perpetuated on a one at a time basis.
Seventh, why are "recordings and notes of telephone calls" being eliminated from List 1? If the broker-dealer tapes telephone calls, they should be required to turn over those recordings to the customer. Then, why is the treatment unequal on List 2, by requiring the customer to turn over "all recordings and notes of telephone calls"? This again sends a bad message that the FINRA system that requires mandatory arbitration is a system that plays on an unlevel playing field.
Eighth, why is List 12 limited to five securities/products? Why is there any limit at all? This arbitrary treatment again will be seen as a protection of the broker-dealers in a system where mandatory arbitration is seen by many customers as an unfair system.
The playing field needs to be leveled not weighted more toward broker-dealers. Yes, the Discovery Guide probably needs to updated and yes, some of the proposed rules are an improvement but the public perception of the FINRA arbitration system is not something that can be ignored. More transparency on the part of broker-dealers is an issue that must go to the top of the list.