August 24, 2010
I have been practicing as a lawyer in the securities field for 20 years almost exclusively. I am a member of the Board of Directors of the Public Investors Arbitration Bar Association. I am also an arbitrator for FINRA. I generally and frequently appear on behalf of public investors in FINRA arbitrations.
I support the revised discovery guide. It addresses important lessons we have learned as legal practitioners in this area in FINRA related discovery matters over the past decade.
I would caution that, while it incorporates past lessons, it does not address "real time" concerns. Currently, in my practice, I see quite a few cases involving private investments sold by FINRA members, such as private placements, notes, hedge funds and non-conventional investments, like CMOs and CDOS, to name a few. I know that my colleagues and I also see a lot of "product" cases, for defective, albeit fraudulent, ill-structured products that should never have been sold to the investing public or at least a vast subset of the investing public.
The discovery guide does not specifically address production of documents such as "due diligence" and structuring files for these private and non-conventional investments. The production of these documents is critical. It made all the difference in two recent cases I tried, one where arbitrators required the production of due diligence files and one where they did not.
These types of investments have been the subject of several FINRA Notices to Members, particularly recently in NTM 10-22 addressing private placements. Non-conventional investments have been addressed in NTM 03-71 and others as follows:
08-35 – Public Offerings of DPPs and REITS
09-09 – Unlisted REITS and DPPs
03-07 – Obligations When Selling Hedge Funds
03-71 – Obligations When Selling Non Conventional Investments
05-26 – New Products
05-48 – Outsourcing
05-18 – Private Placement of Tenant in Common Interests
Not addressing the products that are currently at the forefront of industry claims is a mistake. An attempt to add in some of what we have learned in these NTMs about selling and due diligence obligations, as well as documentation relating to structuring should be incorporated into the rule.
Regardless, I do support the rule as a positive change from NTM 99-90.