Subject: File No. SR-FINRA-2010-035
From: Steven B Caruso
Affiliation: Maddox Hargett Caruso, P.C.

August 20, 2010

The purpose of this letter is to provide the Securities and Exchange Commission with comments on the above referenced proposed rule change which was filed by the Financial Industry Regulatory Authority, Inc. (FINRA) on July 12, 2010.

I am an attorney whose practice is exclusively devoted to the representation of public investors in their disputes with the securities industry. Moreover, I am a past President and a current member of the Board of Directors of the Public Investors Arbitration Bar Association (PIABA) and am a current public member of the FINRA National Arbitration and Mediation Committee (NAMC).

Subject to consideration of the comments set forth below, it is my personal opinion that, with a few limited exceptions, the proposed revisions to the FINRA Discovery Guide (Discovery Guide) would not only enhance the integrity and efficiency of the entire arbitration process, but that the revisions would also, in many respects, be beneficial for public investors.

The comments that I would submit, for the consideration of the staff of the Commission, in connection with the proposed revisions, are as follows:

Comments to Introductory Portion of the Discovery Guide

I agree with the proposed revisions to the introductory portion of the proposed Discovery Guide which would clarify that that arbitrators can order parties to produce documents that are not on the Document Production Lists and that arbitrators also can order that parties do not have to produce certain documents on the Document Production Lists.

In this respect, however, while I understand the predicates for the proposed revisions to the introductory portion of the proposed Discovery Guide which would clarify that certain items on the Firm/Associated Person Document Production List may not be relevant in a particular case when the firms business model is considered, I believe that, in the interests of fairness and party neutrality, this discussion should also clearly state that certain items on the Customer Document Production List may not be relevant in a particular case when the specific claims that have been asserted by a public investor are considered as well.

I agree with the proposed revisions to the introductory portion of the proposed Discovery Guide which would clarify that electronic files are considered to be documents within the meaning of the Guide.

I agree with the proposed revisions to the introductory portion of the proposed Discovery Guide which would expand the discussion on confidentiality so as to include statements relating to the burden of establishing that documents require confidential treatment and to enumerate factors that arbitrators should consider when deciding questions about confidentiality including, but not necessarily limited to, whether the disclosure would constitute an unwarranted invasion of personal privacy whether there is a threat of harm attendant to disclosure of the information whether the information contains proprietary confidential business plans and procedures or trade secrets whether the information has previously been published or produced without confidentiality or is already in the public domain whether an excessively broad confidentiality order could be against the public interest or could otherwise impede the interests of justice and whether there are legal or ethical issues which might be raised by excessive restrictions on the parties. Unfortunately, in my own experience, the assertion of purported confidentiality by the securities industry in the context of the discovery phase of an arbitration proceeding is a concept that has been repeatedly abused and I firmly believe that the revised guidance that will be provided to arbitrators under the submitted revisions to the introductory portion of the proposed Discovery Guide will reduce these instances of abuse and will inure to the benefit and protection of all public investors.

I agree with the proposed revisions to the introductory portion of the proposed Discovery Guide which would clarify that the required affirmation would have to be produced whenever a party should claim that responsive documents whether such documents were included within the Document Production Lists or otherwise requested on a supplemental basis were not within the partys possession, custody or control.

I agree with the proposed revisions to the introductory portion of the proposed Discovery Guide which would emphasize that parties are not required to create documents in response to items on the Document Production Lists that are not already in the parties possession, custody, or control.

In this respect, however, I would submit that this same guidance should also be applicable to documents that are requested on a supplemental basis as well.

Comments to List 1 Firm/Associated Person Document Productions

Proposed List 1, Item 1 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include, in addition to all agreements and new account documentation, all other account record information that reflects the employment status, annual income, net worth, account investment objectives and documents relating to the risk tolerance of a public investor.

Proposed List 1, Item 2 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include, in addition to correspondence, account statements and transaction confirmations, all other documents that refer and/or relate to asset allocation,diversification, trading strategies and market conditions that were recommended and/or effectuated in connection with the account of a public investor.

Proposed List 1, Item 3 I agree with the new portion of the proposed Discovery Guide which would include the presumptive production, by firms and/or their associated persons, of all documents relating to any investment or trading strategies utilized or recommended in the account of a public investor, including, but not limited to, options programs, and any supervisory review of such strategies.

Proposed List 1, Item 4 I agree with the portion of the proposed Discovery Guide which would clarify that, for claims which allege unauthorized trading, the presumptive production of all documents relating to the purported authorization of such transactions by a public investor would be required.

Proposed List 1, Item 5 I agree with the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents would include materials prepared or used by the firm/associated person, all materials that the firm/associated person provided to the public investor and all materials that mention, refer and/or relate to performance or risk data.

Proposed List 1, Item 6 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include, in addition to all notes, diary entries and calendar entries that mention and/or refer to the account of the public investor at issue, any other notes that mention and/or refer to the public investor, his or her account and/or any of the transactions that were effectuated therein.

Proposed List 1, Item 7 I agree with the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents would not only include records relating to the account of the public investor at issue, such as internal reviews and exception and activity reports, but would also include notes or memoranda evidencing supervisory, compliance or managerial review of the account of the public investor or trades for the period at issue as well as correspondence between the public investor and the firm/associated person relating to the account of the public investor or transactions that bear indications of managerial, compliance, or supervisory review of such correspondence.

Proposed List 1, Item 8 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include, in addition to recordings and notes of telephone calls or conversations about the transactions at issue, telephone logs.

Proposed List 1, Item 9 I agree with the portion of the proposed Discovery Guide which would include the new requirement that the presumptive production of documents would include all documents reflecting communications between the associated person assigned to the account of the public investor at issue and members of the firms compliance department relating to the securities/products and/or the account of the public investor at issue. Notwithstanding the preceding, however, it is my opinion that, in order to further protect the interests of the public investor, the requirements of this item should be expanded so as to include all communications between the associated person assigned to the account of the public investor and any supervisory personnel irrespective of whether such individuals work in the compliance department of a firm or elsewhere.

Proposed List 1, Item 10 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of Forms RE-3, U-4 and U-5 (and their related Disclosure Reporting Pages) as well as all customer complaints filed against the associated person assigned to the account at issue.

Proposed List 1, Item 11 I agree with the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents would include all manuals, bulletins and supplements/updates thereto, irrespective of their names and/or characterizations by the firm. I would especially, however, endorse the inclusion of the new requirement which would include, within the presumptive production of documents, the requirement to produce a list of all manuals and bulletins which may contain directives related to the conduct or product at issue in the claim so that a public investor can identify any additional manual or bulletin sections that may be relevant to his or her claims. This, again, in my own experience, is a discovery obligation that has been repeatedly abused by the securities industry which has continuously taken the position that it is entitled to unilaterally disclose which manuals it wants to produce and I firmly believe that the obligation to provide a list of all of a firms compliance, supervisory and product specific manuals will reduce these instances of abuse and will inure to the benefit and protection of all public investors.

Proposed List 1, Item 12 I agree with the portion of the proposed Discovery Guide which would clarify that the presumptive production of analyses and reconciliations of the account of a public investor would be limited to those analyses and reconciliations that were prepared during the time period at issue and would include any analyses and reconciliations prepared as part of a review of the account of a public investor or any of the transactions at issue.

Proposed List 1, Item 13 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of all exception reports, supervisory activity reviews, concentration reports, active account runs, and similar documents for not only the account of the public investor at issue, but also, in matters where failure to supervise has been alleged, for other accounts of public investors handled by the associated person. I do not, however, agree that the applicable time period for the production of the required documents should be limited to those documents that were generated not earlier than one year before or not later than one year after the transactions at issue.

Proposed List 1, Item 14 I agree with the portion of the proposed Discovery Guide which would retain the presumptive production of internal audit reports at the branch in which the public investor maintained his or her account that focused on the associated person, the transactions at issue or similar conduct by other associated persons in the branch office. I do not, however, agree that the applicable time period for the production of the required documents should be limited to those documents that were generated not earlier than one year before or not later than one year after the transactions at issue.

Proposed List 1, Item 15 I agree with the portion of the proposed Discovery Guide which would retain the presumptive production of all documents relating to any disciplinary action taken against an associated person by any regulator or employer for all sales practice violations or conduct similar to the conduct alleged to be at issue.

Proposed List 1, Item 16 I agree with the new portion of the proposed Discovery Guide which would include the presumptive production, by firms and/or their associated persons, of all documents relating to any investigations, charges or findings by any regulator (state, federal or self-regulatory organization) and the firms and/or their associated persons responses to such investigations, charges, or findings for the associated persons alleged improper behavior similar to that alleged in the Statement of Claim of a public investor. Notwithstanding the preceding, however, I would submit that this Item should be further expanded so as to include both the alleged improper behavior of a firm, itself, that is similar to that alleged in the Statement of Claim of a public investor as well as any product that is similar to the product at issue in the account of a public investor.

Proposed List 1, Item 17 I agree with the portion of the proposed Discovery Guide which would expand the presumptive production of examination reports or similar reports following an examination or an inspection conducted by a state or federal agency or a self-regulatory organization that focused on the associated persons or the transactions at issue or that discussed alleged improper behavior in the branch against other individuals similar to the improper conduct alleged in the Statement of Claim of the public investor. Notwithstanding the preceding, however, I would submit that this Item should be further expanded so as to include both the alleged improper behavior of a firm, itself, that is similar to that alleged in the Statement of Claim of a public investor as well as any product that is similar to the product at issue in the account of a public investor. I do not, however, agree that the applicable time period for the production of the required documents should be limited to those documents that were generated not earlier than one year before or not later than one year after the transactions at issue.

Proposed List 1, Item 18 I agree with the portion of the proposed Discovery Guide which would include, within the Discovery Guide itself, the requirement that firms and/or their associated persons must produce to a public investor copies of all documents they receive by subpoena or by informal document requests directed to non-parties.

Proposed List 1, Item 19 I agree with the new portion of the proposed Discovery Guide which would include the presumptive production, by firms and/or their associated persons, of documents that provide the associated persons gross and net compensation, on an order-by-order basis, for the transactions at issue in the Statement of Claim of the public investor or, alternatively, if the account at issue was the subject of a fee arrangement that was not based on remuneration per trade, firms and/or their associated persons would be required to produce a record of compensation earned for the period when the transactions in the account of a public investor took place.

Proposed List 1, Item 20 I agree with the new portion of the proposed Discovery Guide which would include the presumptive production, by firms and/or their associated persons, of documents that provide all compensation, monetary and non-monetary, received by the associated person who handled the account of the public investor including, but not limited to, monthly commission runs that reflect the securities traded, dates traded, whether the trades were solicited or unsolicited, and the gross and net commission from each trade.

Proposed List 1, Item 21 I agree with the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents describing the basis upon which the firm compensated the associated person, during the period of time at issue, would not only include any bonus or incentive program and compensation and commission schedules, but would also include the production of all agreements pertaining to the relationship between the associated person and the firm, summarizing the associated persons compensation arrangement or plan with the firm, including commission and concession schedules, bonus or incentive plans, and schedules showing compensation.

Proposed List 1, Item 22 I agree with the new portion of the proposed Discovery Guide which would include the presumptive production, by firms and/or their associated persons, for claims with allegations relating to an insurance product that includes a death benefit, of all documents relating to the insurance holdings of a public investor and the recommendations, if any, that the firm/associated person communicated to a public investor regarding insurance products.

Items Firms/Associated Persons Would No Longer Be Required to Produce

I agree with the stated rationale for the portion of the proposed Discovery Guide which would eliminate the presumptive production of holding pages.

It is less clear, however, that the stated rationale for the portion of the proposed Discovery Guide which would eliminate the presumptive production of order tickets that their relevancy is limited to claims of unauthorized trading is entirely accurate. There are numerous other instances where the information that is contained on an order ticket would be material and relevant to a claim of the public investor including, but not limited to, indications as to whether a trade was solicited or unsolicited (which order ticket indication may differ from that which is reflected on a transaction confirmation), whether a trade was reviewed and approved by any supervisory personnel, the time that an order was entered and/or executed etc.

Based on the preceding, in the event that the Commission is going to approve the proposed elimination of the presumptive production of order tickets, then I believe that it needs to be made clear to both the parties involved in an arbitration proceeding and, more importantly, arbitrators that order tickets may be relevant to claims that have been asserted by a public investor other than claims which assert unauthorized trading.

Comments to List 2 Public Investor Document Productions

Proposed List 2, Item 1 If there is a single Item in the current Discovery Guide that, in my own personal experience, has led to more public investors deciding not to pursue their claims in the context of an arbitration proceeding, it would be the presumptive production of their income tax returns and the income tax returns for their wholly-owned businesses especially when those wholly-owned businesses did not have any ownership interest in the account at issue. I must, accordingly, note my objection to this entire Item as well as the proposed applicable time period of three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed. With respect to my objection as to the necessity for the production of any income tax returns, the information that is reflected on a income tax return is something that a firm/associated person was supposed to have ascertained and documented prior to the recommendation of the purchase or sale of each security in the public investors account in accordance with their customer-specific suitability determinations. Either the firm/associated person complied with FINRAs rules and documented this information at the time of each recommendation or they did not. To permit a firm/associated person to attempt to justify the suitability of a recommendation, after the fact, through the benefit of new information obtained through discovery that is procured through an arbitration proceeding, is unseemly at best. Similarly, with respect to my objection as to the applicable time period for the production of any income tax returns, to require the production of income tax returns through the date that the Statement of Claim was filed even in those circumstances where the transactions at issue may have occurred up to six (6) years before the Statement of Claim was actually filed again ignores the reality that suitability is a determination that is required to have been made at the time that the recommendation was presented to the public investor. At the very least, this time period should be limited to the years when the transactions at issue in the Statement of Claim were effectuated and certainly never for a period of time that exceeds when the account at issue may have been closed.

Proposed List 2, Item 2 I agree with the portion of the proposed Discovery Guide which would clarify that a public investor is not required to create a financial statement or similar statement of his or hers assets, liabilities and/or net worth. Notwithstanding the preceding, however, I must still note my objection to the same portion which would require the presumptive production of any financial statements as well as the proposed applicable time period of three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed. With respect to my objection as to the necessity for the production of any financial statements, the information that is reflected on a financial statement is something that a firm/associated person was supposed to have ascertained and documented prior to the recommendation of the purchase or sale of each security in the public investors account in accordance with their customer-specific suitability determinations. Either the firm/associated person complied with FINRAs rules and documented this information at the time of each recommendation or they did not. To permit a firm/associated person to attempt to justify the suitability of a recommendation, after the fact, through the benefit of new information obtained through discovery that is procured through an arbitration proceeding, is unseemly at best. Similarly, with respect to my objection as to the applicable time period for the production of any financial statements, to require the production of financial statements through the date that the Statement of Claim was filed even in those circumstances where the transactions at issue may have occurred up to six (6) years before the Statement of Claim was actually filed again ignores the reality that suitability is a determination that is required to have been made at the time that the recommendation was presented to a public investor. At the very least, this time period should be limited to the years when the transactions at issue in the Statement of Claim were effectuated and certainly never for a period of time that exceeds when the account at issue may have been closed.

Proposed List 2, Item 3 I do not have any objection to the portion of the proposed Discovery Guide which would expand the presumptive production of documents that a customer received from the firm/associated person so as to include research reports concerning the investments at issue. At the same time, I would note that the proposed elimination of the mandatory production of account statements and confirmations, if a customer stipulates to having received them and there arent any handwritten notations reflected thereon, will alleviate unnecessary costs and burdens that had previously been imposed on customers.

Proposed List 2, Item 4 I do not have any objection to the portion of the proposed Discovery Guide which would amend the presumptive production of documents so as to permit a public investor to provide a written authorization to allow a firm/associated person to obtain copies of account statements for accounts that a public investor may have maintained at securities firms other than the respondent firm. Notwithstanding the preceding, however, I must still note my objection to the proposed applicable time period of three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed. To require the production of account statements through the date that the Statement of Claim was filed even in those circumstances where the transactions at issue may have occurred up to six (6) years before the Statement of Claim was actually filed again ignores the reality that suitability is a determination that is required to have been made at the time that the recommendation was presented to a public investor. At the very least, this time period should be limited to the years when the transactions at issue in the Statement of Claim were effectuated and certainly never for a period of time that exceeds when the account at issue may have been closed.

Proposed List 2, Item 5 I do not have any objection to the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include all documents that a public investor provided to the firm/associated person relating to the account or transactions at issue.

Proposed List 2, Item 6 I do not have any objection to the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents would be limited to any account analyses and/or reconciliations that were prepared by or for a public investor relating to the accounts at the respondent firm or transactions with the respondent firm during the time period at issue.

Proposed List 2, Item 7 I do not have any objection to the portion of the proposed Discovery Guide which would clarify that the presumptive production of documents would be limited to any notes, including entries in diaries or calendars, that were prepared by or for a public investor relating to the accounts at the respondent firm or transactions with the respondent firm during the time period at issue.

Proposed List 2, Item 8 I do not have any objection to the portion of the proposed Discovery Guide which would retain the presumptive production of recordings and notes of telephone calls or conversations about the account of a public investor that is at issue which occurred between a public investor, or any person acting on his or her behalf, and the associated person. Similarly, for those matters in which a claim of unauthorized trading has been asserted, I do not have any objection to the portion of the proposed Discovery Guide which would retain the presumptive production of telephone records, including telephone logs, that evidence telephonic contact between the public investor and the firm/associated person.

Proposed List 2, Item 9 I do not have any objection to the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include all correspondence that a public investor may have had relating to the account or transactions at issue.

Proposed List 2, Item 10 I do not have any objection to the portion of the proposed Discovery Guide which would retain the presumptive production of previously prepared written statements by persons with knowledge of the facts and circumstances related to the account of the public investor at issue, including those by accountants, tax advisors, financial planners, other associated persons and any other third parties.

Proposed List 2, Item 11 I do not have any objection to the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include non-confidential settlement agreements that a public investor may have had relating to prior securities arbitration and/or litigation proceedings.

Proposed List 2, Item 12 I do not have any objection to the portion of the proposed Discovery Guide which would expand the presumptive production of documents so as to include a list of accounts over which a public investor may have had trading authority in his or her capacity as a trustee.

Proposed List 2, Item 13 I have several objections to the portion of the proposed Discovery Guide which would expand the presumptive production, in every arbitration proceeding, of all written documents that a public investor received or obtained from any source relating to the transactions or products at issue. My first objection is that the absence of any guidance as to the period of time for which responsive documents would be presumptively discoverable renders the same as extremely burdensome for a public investor. If, in fact, the predicate for the inclusion of this Item was to procure evidence concerning the bases for a public investors trading decisions in the transactions that are at issue, as has been stated in the rule filing, then the time limitation of prior to the purchase or sale of the investment at issue should be incorporated within the Item. Finally, I would note my objection to the presumptive production of documents in response to this Item when it appears to be duplicative of the same documents that would be applicable to List 2, Item 15.

Proposed List 2, Item 14 I do not have any objection to the portion of the proposed Discovery Guide which would, in matters in which a claim of unauthorized trading has been asserted, retain the presumptive production of documents that a public investor relied on, if any, to show that transactions were made without his or her knowledge or consent.

Proposed List 2, Item 15 I have several objections to the new portion of the proposed Discovery Guide which would include the presumptive production, in every arbitration proceeding, of all materials that a public investor received or obtained from any source relating to the transactions or products at issue, and other investment opportunities, including research reports, sales literature, performance or risk data, prospectuses and other offering documents, including documents intended or identified as being for internal use only, and worksheets or notes. My first objection is that this Item, as presently constituted, is that it is so vague and innocuous as to render the same incapable of being understood or responded to in a meaningful manner. My second objection is that the absence of any guidance as to the period of time for which responsive documents would be presumptively discoverable renders the same as extremely burdensome for a public investor. If, in fact, the predicate for the inclusion of this Item was to procure evidence concerning the bases for a public investors trading decisions in the transactions that are at issue, as has been stated in the rule filing, then the time limitation of prior to the purchase or sale of the investment at issue should be incorporated within the Item. Finally, I would note my objection to the presumptive production of documents in response to this Item when it appears to be duplicative of the same documents that would be applicable to List 2, Item 13.

Proposed List 2, Item 16 I do not have any objection to the new portion of the proposed Discovery Guide which would include the presumptive production, in every arbitration proceeding, of either a resume or some other document which sets forth a description of the public investors educational and employment background.

Proposed List 2, Item 17 I do not have any objection to the new portion of the proposed Discovery Guide which would include the presumptive production, in every arbitration proceeding, of either a resume or some other document which sets forth a description of the public investors educational and employment background. Notwithstanding the preceding, however, I would submit that this Item appears to be substantially duplicative of the documents that would have to be produced in response to List 2, Item 16. I would, accordingly, recommend the consolidation of these two (2) Items into a single Item.

Proposed List 2, Item 18 I do not have any objection to the portion of the proposed Discovery Guide which would include, within the Discovery Guide itself, the requirement that a public investor must produce to a firm/associated person copies of all documents received by subpoena or by informal document requests directed to non-parties.

Proposed List 2, Item 19 I do not have any objection to the new portion of the proposed Discovery Guide which would include the presumptive production, in every arbitration proceeding involving an insurance product that provides a death benefit, of all insurance documents that a public investor received from an insurance sales agent or securities broker relating to the insurance product.

Items Customers Would No Longer Be Required to Produce

I agree with the stated rationale for the portion of the proposed Discovery Guide which would eliminate the presumptive production of documents that refer to any action taken by the customer to limit losses in the transactions at issue.

Applicable Time Periods for Public Investor Document Productions

Finally, as the staff of the Commission considers this proposed rule change, I would submit that there continues to be a significant disparity between the applicable period of time for the presumptive production of the indicated documents by a firm/associated person and the applicable period of time for the presumptive production of the indicated documents by a public investor.

For example, it is clear that the proposed applicable period of time for the presumptive production of a substantial majority of documents by a firm/associated person would be limited to either the period of time when the transactions at issue took place List 1, Items 1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, 19, 20, 21 and 22 or to the period of time that corresponds to no more than one (1) year before through one (1) year after the transactions at issue took place List 1, Items 13, 14 and 17.

With respect to a public investor, however, the proposed applicable period of time for the presumptive production of a substantial majority of documents is either the period of time that corresponds to three (3) years prior to the transactions at issue through the date of the filing of the Statement of Claim List 2, Items 1, 2, 4 and 11 or to the period of time that has no limitation whatsoever List 2, Items 9, 10, 12, 13, 15, 16, 17, 18 and 19.

As indicated in several of my prior comments, to require the production of any documents through the date that a Statement of Claim was filed even in those circumstances where the transactions at issue may have occurred up to six (6) years before the Statement of Claim was actually filed again imposes an undue burden and hardship on a public investor and, at the very least, all time periods imposed on a public investor should be limited to the years when the transactions at issue in the Statement of Claim were effectuated and certainly never for a period of time that exceeds when the account at issue may have been closed.

Conclusion

In summary, it is my personal opinion that the proposed revisions to the Discovery Guide should be modified as I have suggested and then approved, on an accelerated basis, without any further delay.

Thank you for having provided me with the opportunity to provide the Commission with my thoughts and suggestions on this proposed rule change.