July 11, 2013
I am pleased to comment on FINRA's proposed revisions to the Discovery Guide. By way of background, I served on FINRA's Discovery Task Force, which worked on the proposed rule, and I was a public member of the NAMC from 2002 to 2007. I am currently a director (and former president) of the Public Investors Arbitration Bar Association (PIABA) and a public member of the Securities Industry Conference on Arbitration (SICA). Primarily, however, the perspective I offer is based on having represented customers in securities arbitrations since the mid-1980's.
The previous version of the Discovery Guide left open the issues of electronic discovery and the special needs related to product cases. In my opinion, FINRA has generally done a fine job in correcting these omissions.
FINRA's recognition that there is such a thing as a product case is significant. In my experience, many arbitrators, particularly older ones, view customer claims as controversies between clients and their brokers in which the key questions involve the relations and communications only between broker and client. This narrow and outdated view leads them to limit discovery unduly. However, over the last decade customer claims are increasingly focused on brokerage firm misconduct and misrepresentations in the marketing of particular products, such as auction rate securities, subprime-based bond funds or fraudulent private placements. In most of these situations, the broker is just as deeply in the dark about the product at issue as the customer. The key documents, such as those concerning the firm's due diligence about the product, may never find their way to individual brokers. Given the mass-marketing of these products, firms are frequently the subject of class action complaints and or regulatory actions in which they are under legal obligations to maintain and produce documentary evidence. For this reason, the discovery requests of individual arbitration claimants often parallel those of regulators, class counsel as well as other claimants. As a practical matter, this means that the firms that peddle dubious products are already under multiple discovery demands for much of the same information. Thus, much of whatever costs are associated with gathering and reviewing the information have already been incurred by the time any single customer claim is considered.
I applaud FINRA's recognition of the need for parties to produce e-discovery in a reasonably usable format. I have experienced firms producing Excel spreadsheets containing thousands of entries as printed pdfs. This form of production makes them unusable and forces claimants to incur tremendous expense to re-enter data that already exists on a document that can be produced to the opposing party at virtually no cost. I also welcome FINRA's emphasis on usability and its apparent willingness to educate arbitrators on e-discovery issues.
My single greatest concern about FINRA's discovery proposal concerns the Guide's discussion of objections to discovery based on claims of cost or burden of production. Again, in my experience, many arbitrators accept such claims in the form of boilerplate objections and arguments by counsel, without requiring any actual factual evidence of burden or cost. Courts routinely require parties to substantiate these objections. See, Tequila Centinela, S.A. de C.V. v Bacardi Co. Ltd., 242 F.R.D. 1 (D.D.C., 2007) (Court entertains burdensomeness objection to a document production request only when the responding party demonstrates how the request is overly broad, burdensome or oppressive, by submitting affidavits or offering evidence which reveals the nature of the burden.). At the least, FINRA should educate its arbitrators about the wisdom ofmaking parties substantiate cost and burden objections.
While FINRA's proposals are quite good, they are by necessity general. Time will tell if they are sufficient to afford customers full and fair discovery of facts that firms would rather keep to themselves. Thus, I favor the current proposal, and encourage FINRA and the SEC to monitor the extent to which the proposed amendments satisfy the legitimate discovery needs of parties.