March 19, 2009
I write concerning the proposed changes to the FINRA discovery guide, based on years of experience in many facets of the arbitration forum, as chair and panelist, but especially as an advocate for investors in the arbitration forum.
I write as I am concerned about the proposed revisions, which expand the scope of documents deemed presumptively discoverable from investors in every securities arbitration the list of documents is already far broader for the investing public and too narrow for the brokerage industry than justified.
Arbitration is meant to be contractual in nature – between two consenting parties. However, the new account documentation signed by the customer that includes the mandatory binding arbitration clause is never explained to the investor, nor that by giving up his rights to litigate the claims in court he may have a better chance at winning a greater percentage of his losses. FINRAs stats support that arbitration is not the fairest system to adjudicate an investors claims – as is the simple fact that the industry fights to keep claims out of court, since they know a court mandated system would be more kinder to an investor victim. Having learned in this economic turndown that the American self-regulating organizations did not necessarily perform their responsibilities of oversight and supervision over their members on behalf of the investors requires the SEC to be more proactive to protest those very investors, not to protect the defrauding brokerage industry, especially as here in a forced arbitration system overseen by the very industry the investor is suing with one of the three panelists being from that industry.
One of the reasons FINRA based arbitration is unfair to the investor is the discovery guideline, which permits the brokerage industry to seek dirt and non-relevant documents from the victim, while objecting to and not producing the most basic of documents.
Under the guise of discovery of relevant facts, the defense's ugly tactic is to use this discovery to assert irrelevant facts and turn an arbitration that is supposed to be about whether the broker lied into something altogether different - an attack on the aggrieved investor's character. The newly-proposed discovery lists will only encourage that tactic. The industry understands all to clearly that if you throw enough dirt against an arbitration wall, some of it will stick.
The task is onerous for an ordinary person, and especially difficult for the elderly, on whom the industry often preys. Now that list is to be expanded to include, amongst other items, loan applications, and tax returns, both in length of years and degree of schedules.
The proposed revisions make arbitration more burdensome, expand and encourage abuse. They should be rejected by the SEC.
Contrarily, the proposed changes do not permit an investor to obtain necessary documents from the industry.
For example, there is little mention of the personnel record of the broker, which will include the nature of the brokers hiring, employment, supervision, and continuing education evidencing knowledge of the industry, market and products recommended to the investor.
There is little mention of the trading of the broker, who often represents to the investor that he too is purchasing the product he is recommending to the investor, thereby increasing the purported credibility of the recommendation.
While hand-written holding pages are a product of yesterday, commission runs and redacted copy of account statements of customers in the same product, as referenced as relevant to a customer arbitration in The Arbitrators Manual, which NtM 99-90 supplements, are relevant to the basis of the brokers recommendation and the compensation for that recommendation.
Further, the industry should not be permitted to redact non-public personal information, whatever that refers to, in other customer complaints. If we have learned nothing else from the derivative problem, transparency is key – as Supreme Court justice Brandeis once wrote, sunlight is the best disinfectant. Why should a firm that receives many complaints against a broker be permitted to hide such information? While state and federal rules of evidence do not necessarily apply to securities arbitrations, such rules would require production of complaints, unredacted.
Additionally, NASD Conduct Rule 3070 requires members to report to NASD the occurrence of certain specified events and quarterly summary statistical information regarding written customer complaints, which may not give rise to Form U-4 or RE-3 filing, but are clearly related to the broker, his activity, and supervision, all of which mandate that such filing should be part of the Form U-4, U-5 and RE-3 production.
The SEC should revisit these issues.
The difference in production is simply relevancy – what did the broker know at the time of recommendation (based on his knowledge of the customer and the product, i.e., NYSE Rule 405, and NASD/ FINRA rules 2010, 2020, and 2310), and what did his firm know about him and his trading – not what the industry can in its dirt and fishing expedition learn years later, where the industry claims the claimant was victimized due to her short skirt and not the predatory nature of the broker, that defrauded clients should somehow have known better. The issue is know your customer, not know your arbitration adversary.
As to further detailed comments regarding the proposed revisions, I express my agreement with the comments in the PIABA comment letter. I nevertheless felt it sufficiently important to express my main concerns separately.