August 23, 2010
I appreciate the opportunity to comment on FINRA's latest attempt to establish a discovery guide for its arbitration cases. I am an attorney who primarily represents customers in claims against brokerage firms. While FINRA's attempt is admirable, it falls well short in a number of areas. It appears that the proposed guide creates more significant burdens on the customer than it does on the brokerages firms. I address some specific issues below.
Proposed List 1, Item 10 should require a firm to produce all complaints of the broker at issue. Complaints are potential supervisory red flags for the brokerage firms. To the extent the broker has multiple complaints against him or her (even those not necessarily related to the customer at issue), it should put the firm on on notice that they have a problem broker.
I support the inclusion of Proposed List 1, Item 20, which provides that Respondent produce full commission runs. These are important in suitability and unauthorized trading cases and should be produced.
Proposed List 2, Item 11 is put into two parts – Part A requests complaints and answers from all securities cases that the Claimant was involved in and Part B, which requests for settlement agreements from those complaints. While Part A is in the current Discovery Guide and seems logical, Part B is problematic.
Settlement agreements in securities matters (and many other types of cases) typically have confidentiality clauses, and some even preclude the client from even acknowledging the existence of the settlement agreement. Many of these agreements have strict consequences for a client who breaches the confidentiality clauses, and any requirement to produce these agreements would trigger those consequences. This can create a dilemma where a customer is supposed to keep a prior settlement agreement confidential, but then may be ordered to produce the agreement by the panel. This part of the proposed rule should be eliminated.
On the other hand, why arent the brokerage firms required to produce their settlement agreements? It only seems fair that if the claimant customer has to produce these agreements, then the firm should have to as well, especially those involving the broker at issue. If the matter is a product case, then the firm should have to produce settlement agreements related to the investment at issue. This could easily be made part of List 1, Item 10.
Proposed List 2, Item 12 requires a customer to produce documents showing the customers ownership or control of any business entity, and it also requires customers to produce documents showing accounts over which a Trustee has trading authority. These requests are not always relevant. For example, this would not be relevant for an unauthorized trading case, nor would it be relevant for most suitability cases.
NASD Rule 2310 looks at suitability in the context of a customers financial resources, tax status, and investment objectives. Sophistication is not included in 2310, as a clients relative sophistication is usually not relevant for suitability cases.
Proposed List 2, Item 15 asks a customer to produce all materials received from any source relating to the investments or products at issue, and all materials related to other investment opportunities. The first part of this request is duplicative of List 2, Item #13 and is unnecessary.
The second part of this request asks for documents that are completely irrelevant to the issues in most cases. This request is clearly overbroad and overly burdensome. This would require a customer to produce documents if a customer considered investing in another product but decided not to. There is no relevance to a foregone investment opportunity.
List 2, Item 19 asks a customer to produce insurance information to the extent the claim involves an insurance product with a death benefit. A customers potential life insurance benefits rarely has relevance to ANY securities case. Life insurance proceeds are obviously paid out after the owner dies and is very different than what investments a customer owns during his/her lifetime. Taking into account this insurance information is irrelevant, because this information is completely immaterial to the customers current financial picture and the propriety of an investment product.
Moreover, FINRA Rule 12200 specifically excludes disputes involving the insurance business activities of a member from FINRA arbitration. If FINRA wants to exclude insurance from its forum, then how could information about insurance products be relevant to securities cases? Simply, insurance information is not relevant to securities cases because insurance provides different benefits than securities.
Again, thank you for the opportunity to comment on this proposed guide.
David Neuman, Esq.
Stoltmann Law Offices, P.C.