March 31, 2009
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 June 11, 2008.
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 current member of FINRAs National Arbitration and Mediation Committee and a past President and a current member of the Board of Directors of the Public Investors Arbitration Bar Association.
I would like to begin my comment letter with a few general observations that will hopefully be of assistance to the staff of the Commission as it considers the appropriateness of each of the items that are set forth in the proposed Discovery Guide.
1. As the staff of the Commission is aware, we are currently in an environment where both the level of distrust of Wall Street and the entire financial services arena has, in the entire history of our country, never been higher - so the importance of leveling the playing field for public investors in an arbitration forum that, at the same time, provides them with an economical, expeditious and meaningful and non-intrusive opportunity to recover their improperly taken financial assets is of critical importance.
2. As the staff of the Commission is aware, the approval or disapproval of the proposed revisions to the Discovery Guide should not be viewed within the context of an all or none decision. There are, in fact, many portions of the rule filing that have merit while, at the same time, there are many other portions that, at least in my opinion, would be a total disaster for public investors if they were to be approved in their present format.
3. As the staff of the Commission considers each of the items that are set forth in the proposed revisions to the Discovery Guide, it is important to remember that the critical goals in an arbitration proceeding are to ascertain the truth in an economical and expeditious manner so that the members of an arbitration panel can determine whether or not any improper behavior occurred that would warrant a monetary recovery to a public investor.
4. As the staff of the Commission considers each of the items that are set forth in the proposed revisions to the Discovery Guide, it is equally as important to remember that the purpose of discovery in an arbitration proceeding is not to permit a firm and/or associated person to dig-up-dirt or to otherwise perform a financial colonoscopy in hindsight or to otherwise develop defenses after-the-fact so as to, individually and/or collectively, assist a firm and/or associated person to avoid their obligations if a public investor has been subjected to improper behavior.
5. As the staff of the Commission considers each of the items that are set forth in the proposed revisions to the Discovery Guide, it is important to note the tremendous disparities that are associated with the time frames that would be associated with the required document productions between those being imposed on public investors and those being imposed on firms and/or associated persons.
6. As the staff of the Commission considers each of the items that are set forth in the proposed revisions to the Discovery Guide, it is important to note that the overwhelming majority of arbitration panels will require the production of all of the presumptively discoverable items in the Discovery Guide irrespective as to whether or not those items may be relevant and/or applicable to the issues in the arbitration proceeding before them.
7. Finally, as the staff of the Commission considers each of the items that are set forth in the proposed revisions to the Discovery Guide, it is critical that consideration be given to both the public customers who will proceed through the arbitration process without the assistance of legal counsel as well as to the public customers who are senior citizens - how will each of those constituency groups be impacted by these proposed rules?
Let me now turn my attention to the proposed revisions and/or additions to the Discovery Guide that are of the greatest concern to me.
List 1: Documents and Information to Be Produced in All Customer Cases by Firms and/or Associated Persons
List 1, Item 2: All correspondence between the customer and firm/associated person(s) relating to the transaction(s) at issue. (Unless separately requested, confirmation slips and monthly statements need not be produced.)
The presumptively discoverable documents required to be produced in response to this item should not be limited to the transaction(s) at issue, but should encompass all correspondence between the customer and firm/associated person(s).
List 1, Item 4: All documents evidencing any investment or trading strategies utilized or recommended in customer's account, including, but not limited to, options programs, and any supervisory review of said strategies.
The presumptively discoverable documents required to be produced in response to this item should not be limited to the investment or trading strategies utilized or recommended in customers account, but should encompass all supervisory reviews in connection with all associated person(s) who were associated with the customers accounts.
List 1, Item 6: All Forms RE-3, U4, and U5 and Disclosure Reporting pages including all amendments, for the associated person, all customer complaints identified in such forms, and all customer complaints alleging conduct of a similar nature to that alleged in the Statement of Claim against the associated person, redacted to prevent the disclosure of nonpublic personal information of that customer.
The presumptively discoverable documents required to be produced in response to this item should not be limited to complaints alleging conduct of a similar nature to that alleged in the Statement of Claim, but should encompass all customer complaints that have been asserted against the associated person.
As presently constituted, this item would permit the firm/associated person to make the unilateral determination as to what would constitute a complaint alleging conduct of a similar nature to that alleged in the Statement of Claim, and a customer would not have any viable means to challenge that unilateral determination.
List 1, Item 7: All sections of the Firms manuals and any updates thereto during the relevant time related to the claims alleged in the Statement of Claim, including separate or supplemental manuals governing the duties and responsibilities of the associated person and supervisors, any bulletins (or similar notices) issued by the Firm, and the entire table of contents and index to each such Manual.
The presumptively discoverable documents required to be produced in response to this item should not be limited to the tables of contents and indexes to manuals and bulletins governing the duties and responsibilities of the associated person and supervisors, but should encompass all manuals and bulletins that a firm maintains in accordance with its duties and obligations under NASD Conduct Rule 3010 and NYSE Board Rule 342.
As presently constituted, this item would permit the firm/associated person to make the unilateral determination as to what would constitute a manual and/or bulletin that governs the duties and responsibilities of the associated person and supervisors, and a customer would not have any viable means to challenge that unilateral determination.
Finally, as presently constituted, this item would not require the production of any product specific manuals and/or bulletins - this is an omission that must be remedied.
List 2: Documents and Information to Be Produced in All Customer Cases by Customers
List 2, Item 1: Complete copies of all customer and customer owned business (including partnership, corporate) federal income tax returns filed by the customer, for the five years prior to the first transaction at issue in the arbitration through year in which the arbitration claim is filed. The customer will represent that the income tax returns being provided are identical to those that were filed with the Internal Revenue Service.
As the members of the Commission may be aware, under the prior Discovery Guide, the documents that were presumptively discoverable were limited to pages 1 and 2 of Form 1040, Schedules B, D, and E, or the equivalent for any other type of return, for the three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed.
As a preliminary matter, it should be noted that, in my opinion, customers should not have to produce any portions of their income tax returns in an arbitration proceeding in view of the fact that these documents are not required to be provided to firms and/or associated persons either when a customers account is established or at any time thereafter during the course of their relationship.
It should be further noted that if customers are going to continue to be forced to produce copies of their income tax returns, then firms and associated persons should also be required to produce similar copies of their own income tax returns.
In addition to the preceding, for the reasons that are set forth below, the proposed revisions to this section of the discovery guide are unacceptable:
1. There is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to five (5) years prior to the first transaction at issue - other than to intimidate customers and to make it more difficult, if not impossible, for aggrieved investors to pursue their claims. For example, if you consider the scenario of a customer who asserts an arbitration claim concerning a single trade that occurred five (5) years and eleven (11) months before the filing of his/her Statement of Claim, under the proposed revisions to the discovery guide, this customer would presumptively have to produce eleven (11) years of his/her tax returns.
2. There is absolutely no reason for the tax returns that would be presumptively discoverable having been expanded so as to now encompass the complete copies of the customers entire tax returns - which would include all schedules and all statements and all worksheets that were incorporated into each of the same. For example, if you consider the information that is set forth on Schedule A to an income tax return, it is entirely conceivable that the members of an arbitration panel will be unfairly influenced by a customers choice of the organizations to which he/she makes charitable contributions if those organizations are politically and/or morally inapposite to the arbitrators own individual political and/or moral leanings.
3. There is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to five (5) years prior to the first transaction at issue when there is no corresponding obligation that is being imposed on firms and/or their associated persons - for any of their presumptively discoverable documentation - that even comes close to approaching the stated five (5) year period of time that would be foisted on customers.
4. Finally, it is incomprehensible that a customer would be required to make any supplemental representation - for this or any other presumptively discoverable document production - when there is no corresponding obligation for a firm or associated person to provide any similar representation as to any of their presumptively discoverable document production obligations.
List 2, Item 2: Financial statements or similar statements of the customers assets, liabilities, and/or net worth for the period covering the five years prior to the first transaction at issue in the arbitration through the date the Statement of Claim was filed.
As a preliminary matter, it should be noted that, in my opinion, customers should not have to produce any financial statements in an arbitration proceeding in view of the fact that these documents are not required to be provided to firms and/or associated persons either when a customers account is established or at any time thereafter during the course of their relationship.
In addition to the preceding, for the reasons that are set forth below, the proposed revisions to this section of the discovery guide are unacceptable:
1. There is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to five (5) years prior to the first transaction at issue - other than to intimidate customers and to make it more difficult, if not impossible, for aggrieved investors to pursue their claims. For example, if you consider the scenario of a customer who asserts an arbitration claim concerning a single trade that occurred five (5) years and eleven (11) months before the filing of his/her Statement of Claim, under the proposed revisions to the discovery guide, this customer would presumptively have to produce eleven (11) years of financial statements.
2. The insertion of the undefined phrase similar statements provides absolutely no guidance to the parties involved in an arbitration proceeding and will, in fact, lead to various inconsistent interpretations that will lead to more - rather than less - discovery disputes.
3. It should be clarified that customers do not have an obligation to create financial statements if such statements do not already exist and are not already in their possession, custody and/or control.
List 2, Item 4: Identify each securities firm where the customer has maintained an account for the five year period prior to the first transaction at issue in the arbitration through the completion of discovery produce account statements for the five years prior to the first transaction at issue in the arbitration through the completion of discovery and provide a written authorization allowing the respondent firm/associated person to obtain the account statements directly from each securities firm.
As the members of the Commission may be aware, under the prior Discovery Guide, the documents that were presumptively discoverable were limited to account statements and confirmations for accounts maintained at securities firms other than the respondent firm for the three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed.
As a preliminary matter, it should be noted that, in my opinion, customers should not have to produce any documents and/or information concerning their other brokerage accounts in an arbitration proceeding unless these documents and/or information responses were provided to firms and/or associated persons either when a customers account was established or at any time thereafter during the course of their relationship.
In addition to the preceding, for the reasons that are set forth below, the proposed revisions to this section of the discovery guide are unacceptable:
1. There is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to five (5) years prior to the first transaction at issue - other than to intimidate customers and to make it more difficult, if not impossible, for aggrieved investors to pursue their claims. For example, if you consider the scenario of a customer who asserts an arbitration claim concerning a single trade that occurred five (5) years and eleven (11) months before the filing of his/her Statement of Claim, under the proposed revisions to the discovery guide, this customer would presumptively have to produce eleven (11) years of account statements.
2. There is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to continue through the completion of discovery when there is no corresponding obligation that is being imposed on firms and/or their associated persons - for any of their presumptively discoverable documentation - that even comes close to approaching the completion of discovery time period that would be foisted on customers.
3. Finally, it is incomprehensible that a customer would be required to provide any authorization for a firm/associated person to have direct access to any of their confidential financial records and/or information at any other firm - for this or any other presumptively discoverable document production - when there is no corresponding obligation for a firm or associated person to provide any similar authorization as to any of their presumptively discoverable document production obligations.
List 2, Item 8: All recordings and notes of telephone calls or conversations about the customers accounts or transactions at issue that occurred between the associated person(s) and the customer (and any person purporting to act on behalf of the customer).
It defies logic, traditional notions of justice and just plain common sense to require customers to produce recordings of telephone calls or conversations with firms and/or associated persons while, at the same time, the corresponding obligation of firms and/or associated persons to produce any recordings that they may have has been eliminated from the new Discovery Guide.
As the staff of the Commission may be aware, under the prior discovery guide, recordings of telephone conversations between firms and/or associated persons (that were in the possession of said firms and/or associated persons) were deemed to be presumptively discoverable in all customer-initiated arbitration proceedings. See, NASD Notice to Members 99-90, List 1, Item 7.
List 2, Item 11: Identify and produce, through the completion of discovery, copies of Complaints/Statements of Claim and Answers filed in all civil actions involving securities matters and securities arbitration proceedings in which the customer has been a party, and all final decisions or Awards or non-confidential settlements entered in these matters. If a person is a party to a confidential settlement agreement, the underlying documents of the confidential settlement agreement shall be identified. Although not presumptively discoverable, a confidential settlement agreement may be obtained with an order from the panel.
As a preliminary matter, it should be noted that, in my opinion, there is absolutely no reason for the applicable time period for these presumptively discoverable documents having been expanded to include from the beginning of time through the completion of discovery when there is no corresponding obligation that is being imposed on firms and/or their associated persons - for any of their presumptively discoverable documentation - that even comes close to approaching from the beginning of time through the completion of discovery time period that would be foisted on customers.
In addition to the preceding, for the reasons that are set forth below, the proposed revisions to this section of the discovery guide are unacceptable:
1. There is absolutely no logical justification to require customers to produce documentation concerning all prior arbitration and/or litigation proceedings when the corresponding obligation that has been proposed for firms/associated persons would be limited to just documentation that involves complaints alleging conduct of a similar nature to that alleged in the Statement of Claim. See, e.g., List 1, Item 6, of the proposed new Discovery Guide
2. There is absolutely no logical justification to require customers to produce documentation concerning settlements of prior arbitration and/or litigation proceedings when there is no corresponding obligation that has been proposed for firms/associated persons that would require the production of any of their settlement documentation.
List 2, Item 12: Identify loans the customer has applied for or has guaranteed for the five years prior to the first transaction at issue in the arbitration through the date the Statement of Claim was filed produce copies of related loan applications, and provide a written authorization allowing the respondent firm/associated person to obtain loan applications directly from each lender.
The proposed addition of this new item to the discovery guide is not only unacceptable, but it is perhaps the most grotesque indication of the prevalent belief in the financial services industry that, when a public investor has the audacity to assert a claim in a securities arbitration proceeding, it is then acceptable for that public investor to be subjected to a documentary raping so that firms/associated persons can attempt to avoid any monetary responsibilities that they may have for their misconduct.
It should also be noted that, in my opinion, customers should not have to produce any documents and/or information concerning loans in an arbitration proceeding unless these documents and/or information responses were provided to firms and/or associated persons either when a customers account was established or at any time thereafter during the course of their relationship.
In addition to the preceding, for the reasons that are set forth below, the proposed revisions to this section of the discovery guide are unacceptable:
1. There is absolutely no reason for the applicable time period for these presumptively discoverable documents - or any other documents that a customer would have to produce under the new discovery guide - to be expanded to five (5) years prior to the first transaction at issue - other than to intimidate customers and to make it more difficult, if not impossible, for aggrieved investors to pursue their claims. For example, if you consider the scenario of a customer who asserts an arbitration claim concerning a single trade that occurred five (5) years and eleven (11) months before the filing of his/her Statement of Claim, under the proposed revisions to the discovery guide, this customer would presumptively have to produce eleven (11) years of required documents.
2. The portion of this item which would purport to require customers to produce loan documentation concerning any loans that they may have guaranteed, will necessitate the production of documentation concerning non-parties that, under the statutes of a number of states, will violate the financial privacy protections provided thereunder.
3. Finally, it is incomprehensible that a customer would be required to provide any authorization for a firm/associated person to have direct access to any of their confidential financial records and/or information at any other firm - for this or any other presumptively discoverable document production - when there is no corresponding obligation for a firm or associated person to provide any similar authorization as to any of their presumptively discoverable document production obligations.
List 3: Excessive Trading - Documents to Be Produced by Firms/Associated Person(s)
List 3, Item 1: The record of all compensation, monetary and non-monetary including, but not limited to, monthly commission runs for the associated person, listing the securities traded, dates traded, solicited or unsolicited nature, and the gross and net commission from each trade, for all years in which the conduct alleged in the Statement of Claim occurred. The firm may redact names of customers who are not parties to this claim, but may not otherwise redact or delete information. If the firm asserts that the client controlled the trading in the account at issue, sufficient information must be provided to determine which accounts are those of the associated person. In addition, the firm must identify whether the associated person had related accounts that traded at the firm during the period in question.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege churning and/or excessive trading, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
List 4: Failure to Supervise - Documents to Be Produced by Firms/Associated Person(s)
List 4, Item 1: All commission runs and other reports showing compensation of any kind relating to the customers account(s) at issue or, in the alternative, a consolidated commission report relating to the customers account(s) at issue.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege failure to supervise, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the presumptively discoverable documents required to be produced in response to this item should not be limited to commission runs for just the customers account, but should include the complete commission runs for all of the accounts of the associated person.
List 4, Item 2: All exception reports, supervisory activity reviews, activity concentration reports, active account runs and similar documents produced to review for activity in customer accounts relating to the associated person(s) and/or the customers account(s) at issue that were generated not earlier than one year before or not later than one year after the transaction(s) at issue.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege failure to supervise, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the presumptively discoverable documents required to be produced in response to this item should not be limited to the time period of one year before until one year after the transaction(s) at issue, but should encompass all reports and reviews that mention and/or relate to either the customer and/or the associated person(s) that were generated at any point in time throughout the existence of the customers accounts.
List 4, Item 3: Those portions of internal audit reports for the branch in which the customer maintained accounts that: (a) focused on the associated person(s) or the transactions at issue and (b) were generated not earlier than one year before or not later than one year after the transactions at issue and discussed alleged improper behavior in the branch against other individuals similar to the improper conduct alleged in the Statement of Claim.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege failure to supervise, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the presumptively discoverable documents required to be produced in response to this item should not be limited to the time period of one year before until one year after the transaction(s) at issue, but should encompass all reports that mention and/or relate to either the customer and/or the associated person(s) that were generated at any point in time throughout the existence of the customers accounts.
The presumptively discoverable documents required to be produced in response to this item should also not be limited to reports that discuss behavior in the branch that is similar to the improper conduct alleged in the Statement of Claim, but should encompass all reports that mention and/or relate to either the branch and/or the associated person(s) that were generated at any point in time throughout the existence of the customers accounts.
Finally, as presently constituted, this item would permit the firm/associated person to make the unilateral determination as to what would constitute behavior in the branch that is similar to the improper conduct alleged in the Statement of Claim, and a customer would not have any viable means to challenge that unilateral determination.
List 4, Item 5: Copies of any inquiries, charges or findings by any regulator (state, federal or self-regulatory organization) and the responses thereto by the firm/associated person for alleged improper behavior by the associated person similar to that alleged in the Statement of Claim.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege failure to supervise, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the presumptively discoverable documents required to be produced in response to this item should not be limited to documents that concern improper behavior that is similar to that alleged in the Statement of Claim, but should encompass all documents that mention and/or relate to the associated person(s).
Finally, as presently constituted, this item would permit the firm/associated person to make the unilateral determination as to what would constitute behavior that is similar to the improper conduct alleged in the Statement of Claim, and a customer would not have any viable means to challenge that unilateral determination.
List 4, Item 6: Those portions 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 person(s) or the transactions at issue or that discussed alleged improper behavior in the branch against other individuals similar to the conduct alleged in the Statement of Claim.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege failure to supervise, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the last portion of the presumptively discoverable documents required to be produced in response to this item should not be limited to documents that discuss improper behavior that is similar to the conduct alleged in the Statement of Claim, but should encompass all documents that mention and/or relate to any associated person in the branch office.
Finally, as presently constituted, this item would permit the firm/associated person to make the unilateral determination as to what would constitute behavior that is similar to the improper conduct alleged in the Statement of Claim, and a customer would not have any viable means to challenge that unilateral determination.
List 9: Unauthorized Trading - Documents to Be Produced by Firms/Associated Person(s)
List 9, Item 4: Commission runs or other documents sufficient to show all trading by the associated person(s) in the security at issue for a period extending from ten trading days before and after each transaction the customer alleges was unauthorized. The firm/associated person(s) may redact customer names but must disclose the security traded, dates traded, whether trades were solicited or unsolicited and gross and net commission from each trade.
The presumptively discoverable documents required to be produced in response to this item should not be limited to just those Statements of Claim that allege unauthorized trading, but should be provided in each and every arbitration proceeding irrespective of the nature of the claims that have been asserted.
Moreover, the presumptively discoverable documents required to be produced in response to this item should not be limited to the artificial time period of ten days before and after each contested trade, but should include the complete commission runs for all products in all of the accounts of the associated person for the entire period of time that the customers account was maintained with the firm/associated person.
List 12: Claims Involving Particular Products or Securities - Documents to Be Produced by Firms/Associated Person(s)
List 12, Item 1: With regard of up to five securities/products listed below, which are at issue in the claim, produce a record concerning trading activities in the customer accounts of the associated person(s) listing: Account number Trade activity (i.e. buy, sell) Number of shares, unit price, and dollar value of transaction Date traded Solicited or unsolicited and Gross and net commission.
The presumptively discoverable documents required to be produced in response to this item should not be limited to the artificial designation of up to five securities/products, but should include such number of securities/products as may be at issue in the arbitration proceeding - irrespective as to whether that number is 1 or 100.
Thank you for providing me with the opportunity to submit my comments on this proposed rule filing.