April 3, 2009
Elizabeth M. Murphy
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090
RE: Amendments to Discovery Guide in FINRA Arbitrations
Dear Ms. Murphy:
Thank you for the opportunity to comment upon the above-referenced proposal regarding changes to the Discovery Guide which apply to FINRA arbitration matters. I write as an attorney who represents customers in support of the letter submitted by the Public Investor Arbitration Bar Association (PIABA), but also as a former broker and supervisor within the brokerage industry for more than 30 years.
I completely agree with PIABA in its appreciation of the effort of FINRA to resolve the multitude of issues that have presented problems with discovery in FINRA arbitration proceedings. In addition to the low recovery rates by customers, another significant criticism of the FINRA arbitration process has been the widespread discovery abuses committed by FINRA member firms in connection with customer disputes.
While the current Discovery Guide resolved some of the issues which had repeatedly resulted in discovery motion practice, discovery abuses continues to be widespread. In certain cases, the discovery motion practice far exceeds what is normal and necessary for arbitration, thereby defeating the purpose of an expedited preceding presumed by arbitration. Any efforts made by FINRA to reduce the abuse of the system by member firms and attempt to create an equal forum for investors is heartily welcomed by me.
Personal Financial Information
Under the current Discovery Guide, member firms are presumptively entitled, in every case, to much personal financial information relating to the customer. The customer is required to provide financial statements, personal tax returns, business tax returns, and information about other securities accounts. This requirement appears to be in direct contrast with the rule which governs the industry known as the Know Your Customer Rule. The required information is often completely irrelevant in many cases, such as in unauthorized trading cases, fraud cases and cases involving Ponzi schemes and some product cases, yet extensive customer personal information is still deemed presumptively discoverable.
One of my objections to the proposed discovery guide is the addition of even more years worth of documents that the customer must provide. It would seem to make more sense for the firm to produce all of the documents obtained from the customer in order to Know the Customer to determine whether or not the firm was following the rules set forth by FINRA rather than the customer providing the information after the fact.
Perhaps the most disagreeable section of the proposed Discovery Guide is the section relating to customer loan documents. List 2, Category 12 automatically requires the customer to identify all loans applied for by the customer, from 5 years prior to the first transaction complained of through the filing of the Statement of Claim. There is very little valuable information from such loan applications. Arbitrators generally agree, and in many cases where firms have attempted to obtain third party subpoenas for such information, arbitrators usually refuse to issue the subpoena. The relevance of this private financial information is vastly outweighed in nearly every case by the customers privacy rights. If FINRA truly wants to create a fair forum for dispute resolution, which is presumptively what FINRA is attempting in its modification of the Discovery Guide, it should start by addressing the onerous production requirements of the Discovery Guide for customers in FINRA arbitrations, especially in contrast to the lesser requirements of member firms.
The written authorization to third parties to require the production of documents.
This proposed requirement places a new very heavy burden on the customer. Formerly, the brokerage firm was required to prepare a motion to the Chairperson to issue a subpoena, and the customer had a chance to argue against the subpoena if desired. Now the customer is not only expected to do the respondent firms work, the customer is stripped of the opportunity to object to the potential subpoena.
Member Firm Requirements
List 1 sets forth the documents which the industry respondent is presumptively required to turn over in every customer case. The new proposal expands some of the customer-specific information to be made available. For example, List 1, Item 3 now requires the firm to produce all information in the firms possession relating to the customers employment status, financial status, annual income, net worth, investment objectives and risk tolerance. This information should clearly be turned over in every case. Similarly, Item 4 provides that the firm is to turn over documents relating to the trading strategies used in the customers accounts, together with any documents reflecting supervisory review of the strategies. This is the kind of information which a firm should be compiling for its customer accounts, and clearly they should retain and turn over these documents in arbitration proceedings.
I am in favor of the new requirements in terms of supervisory documents required by member firms. The new Guide would expand member firms obligation to turn over supervisory documents. The proposed rule would make exception and activity reports discoverable in every case, rather than just cases alleging failure to supervise. Documents reflecting supervisory review of the broker and of the customers accounts are nearly always relevant.
Several of the new requirements in the proposed Discovery Guide are beneficial to customers, and I support the inclusion of those provisions in a new Discovery Guide. Nonetheless, many proposed revisions drastically increase the burden on customers. It appears that the collective effect of the new Discovery Guide, however, is to increase the burden on customers disproportionately to the burden imposed on member firms and associated persons.