April 1, 2009
March 25, 2009
Ms. Elizabeth Murphy
Security and Exchange Commission
100 F Street
Washington, DC 20549
Re: SR-FINRA-2008-024 (proposed FINRA New Discovery Guide)
Dear Ms. Murphy:
Please accept this submission as my comment on FINRA's proposed Discovery Guide Revision.
I am a member of Brickley, Sears and Sorett, attorneys who represent investors in SRO arbitration. I am also an adjunct professor at Suffolk University Business School in Boston where I teach business ethics classes. I am a member of PIABA. I support the position of PIABA expressed in its upcoming comment letter. In addition, I offer several observations:
A. Presumptively Required Documents - Expansion of the presumptively required documents on the part of the investor is a step in the wrong direction. It is the responsibility of the investment professional to know the customer. To allow the industry access to the customers finances after the fact, imposes not only a needless and unjustified burden on the customer for generally irrelevant material, but allows for a presentation to the panel that has no relationship to what the broker knew about the customer when a certain recommendation or representation was made. This comment relates to several of the proposed changes. 1) The production of any tax returns should be inappropriate in most cases, but the requirement in Item 1 in List 2 for five (5) years returns prior to the initial transaction is abusive. 2) The production of tax returns for non-parties in footnote 2 to this list is remarkable. We cannot think of a more striking invasion of privacy of non-parties. 3) The Financial Statement requirement for five (5) years prior to the questioned transaction is abusive and certainly they are not relevant. 4) The Loan Documents proposal for five (5) years is similarly abusive.
While there may be instances where some of this information is relevant, the presumptively required information is a bad step. Other than what the investment professional learned as a result of his relationship with the customer, the investment history of the customer and the customers assets should not be considered relevant. The proposed rule makes for a post-claim suitability defense of know your claimant instead of know the customer. The notion that the sophistication and other accounts of the customer are factors for the panel in most cases is, or should be, incorrect. The move requiring the customer to provide more documentation, when no documentation should be required, is a dramatic step backward in arbitration.
B. Commission Runs - The most striking and most relevant evidence in most cases is in the investment firms commission run. It often provides the near complete explanation for the unsuitable recommendation. The identity of the same investment in other accounts of the investment professional and the firm are important for the customer to show pattern. Any limitation on access to complete commission runs denies the customer a fair hearing. In all cases, this information should be mandatory.
C. Insurance Disclosure - In every other forum, including court, the presence and amount of insurance, if applicable, must be disclosed. In arbitration there is no such provision and there should be. The result is that small broker-dealers who have insurance can coerce a cheap settlement by falsely claiming no ability to pay. Full disclosure is the watchword in every state by law and FINRA should follow suit.
Please do not hesitate to call me with any questions. Thank you for your consideration.
Your very truly,
John E. Sutherland