March 23, 2009
My name is Steve Buchwalter. I am an attorney. While in the past, I have represented brokers and brokerage firms, I now represent customers. In addition to being a former expert to the U.S. Senate on the topics above, I have represented hundreds and hundreds of clients in securities arbitrations for over a decade.
While I have gone in to detail below for some requests, as a whole I think the proposed rule misses the mark.
List 1, item 11 has been removed.
This list required the broker dealer to produce all records of the firm and associated person relating to the customers account. This information is necessary for the put the customer in the same shoes as the broker and his (hers) supervisor and determine whether the account was handled properly. I fail to see how the firms records of the customer would not be produced.
After all, pursuant to the list of what customers need to produce, a customer would need to produce all of their records relating to their account to the industry. Why is this being taken out?
List 2, item 1
This is outrageous. While I am in a state where tax returns are privileged, many others are not.
It has always been my understanding of FINRA and SEC rules that brokers are required to know their customer – not their arbitration opponent.
Brokers have a duty to disclose all facts and make suitable recommendations. In order for a broker to make a suitable recommendation, the broker needs to know information about his customer. Whether or not the broker met this standard is what the case should be about. In my experience, the brokerage firm already has all of this information at its disposal and during the arbitration, the customer needs to obtain it.
Whether or not the broker fulfilled his obligations is not going to be determined by the customer producing what appears to be every private financial document they have. But if the customer needs to turn these records over, why not the brokerage firm and the broker?
After all, it would not be unusual for brokers tax returns showed more debt to income (creating the need to earn trading commissions), or the exact same stock trading strategy that the broker claims was the customers idea.
The current rule is bad enough, however, the time limits and sections required were related to prior securities trading. The proposed rule expands that the full copies of tax returns which cannot be condoned. The extra sections will have not be probable to any issue that one could possibly expect to surface during an arbitration (and if it does, they can be asked for separately).
The extra sections would show respondents in an arbitration where charitable donations the customer made and medical expenses. Whether or not someone donates money to a Christian Church, Jewish Temple, Muslim Mosque, or the NAACP should be private. So should any medical procedure or condition.
Why are these extra sections necessary and why for an additional five years? And if the SEC decides to change this rule, I request that brokers need to produce the same information.
List 2, Item 2
In my experience, many customers are intimidated when I inform them of the vast amount of private information they will need to produce. Expanding the required information by two years is not necessary.
As described above, the broker needs to know his customer at the time of the transaction, why is it necessary now? Being sued should not be an opportunity to repair lapses that were made when the recommendation was made.
List 2, Item 3
I like the change, but why doesnt the customer get the same information from the broker or brokerage firm? After all, if it is relevant to defendant a customer case, wouldnt it be relevant to prosecuting one?
List 2, Item 4
Expanding this request is not necessary. Especially since the NASD has long held that a customers prior transactions are not relevant in determining suitability. Dept of Enforcement v. Kernweis, No. C02980024 (Feb. 16, 2000) stating that a customer's prior transactions are not relevant to a suitability determination.
List 2, Item 11
Why isnt this also discoverable concerning the broker?
List 2, Item 12
How could this possibly be relevant? This is one of the more over-reaching and anti consumer discovery requests I have ever seen. All this will do is intimidate customers from bringing a claim.
List 4, Item 2 (Failure to Supervise, to be produced by the firm)
If the issue is failure to supervise, why would the old No. 2, which included all other documents reflecting supervision be taken out?
Supervision should go a lot farther than simply having reports.
Deleting the wording from the old list would make it very difficult for a claimants attorney to prove failure to supervise.
List 12, Item 1
While I do like the new request, why is it limited to five securities? If my client has ten securities at issue, why is my discovery limited, when the new requirements for the customer require him to produce any type of document he received from any source, not only on the investments at issue, but for any prospective investment?
Conclusion
As I summarized above, I believe the new rule misses the mark. It appears to be very anti consumer and pro industry. While if the broker did his job, the firm should have everything they need to defend a claim before the first pleading is filed, the documents due to brokers are broader than those due to customers in a dispute. This just seems inherently unfair and anti investor.
Further, my opposition to List 2, Item 2 (loan documents) cannot be stated stronger.
Respectfully submitted:
Steve Buchwalter
16133 Ventura Blvd.
Suite 560
Encino, CA 91436
(818) 501-8987
http://www.securitieslaw-attorney.com