April 7, 2009
Ladies and Gentlemen:
This is to comment on rule changes proposed by FINRA regarding changes to the Discovery Guide. I have practiced in the securities area for more than 35 years during which time I have represented, among others, brokers, registered representatives, and customers. My first SRO arbitration was in 1976.
I am very concerned about the proposed changes. The proposed changes increase the burden on customers who believe that they have been wronged by a brokerage firm or investment professional. The lists of documents to be produced by customers already is far too broad.
My belief is that the broad reach of the Discovery Guide discourages customers from bringing legitimate claims. Before bringing an arbitration, I warn prospective clients that they will be subjected to an invasion of privacy which exceeds that of any other litigation, that they give up protections of California law, and that their financial histories will be the subject of unimaginable scrutiny.
In California, tax returns are privileged. But arbitrators routinely order their production because of the Discovery Guide. In Ponzi scheme cases, tax returns, financial statements, and account statements from other firms have no relevance. But arbitrators routinely order their production because of the Discovery Guide. In cases under the Securities Act of 1933 or California Corporate Securities Act of 1968, tax returns, financial statements, and account statements from other firms have no relevance as anti-fraud remedies are available without proof of reliance, causation, or scienter. Nonetheless, arbitrators routinely order production because of the Discovery Guide.
According to the rules of FINRA and the California Department of Corporations, suitability is determined at the time of a recommendation based upon information then acquired by or made available to the broker. On an analytical level, that makes the customers financial condition not relevant. But arbitrators routinely order production of tax returns, financial statements, and account statements from other firms because of the Discovery Guide.
When the scope of the Discovery Guide is explained to some potential clients, they choose to do nothing to pursue their rights. They would rather give up their potential remedy than their right to privacy. They do not believe that the burden is fair in view of what a broker or firm did to them. I have had clients in a multi-party Ponzi scheme case dismissed because they refused to produce tax returns and monthly statements from other brokerage firms. That case ultimately settled. But those clients who were dismissed did not participate in the settlement.
Rather than expand discovery from customers or those documents which are presumptively discoverable from customers, FINRA should examine the Discovery Guide with an eye towards reducing the burden and invasion of privacy on customers. The defense to a customer case should not become a full frontal assault on the aggrieved customers character, a tax audit, or a war of wringing out every picayune document which is not relevant to a claim.
If the goal of FINRA and the Commission is to frustrate aggrieved customers by requiring the production of documents having little or no relevance to a claim and by unnecessarily invading their privacy, the revisions of List 2 should be accepted. If the goal of FINRA and the Commission is to protect aggrieved customers and make arbitration fair and efficacious, List 2 and the remainder of the Discovery Guide need to be revised to be less invasive and less burdensome.
As to comments on specific matters in the proposed revisions, I am in agreement with the comments of the PIABA comment letter. Thank you.
William P. Torngren