August 24, 2010
August 24, 2010
Nancy M. Morris
Secretary Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-0609
Proposed Rule Change Amendments to the Discovery Guide and Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer Disputes
Dear Ms. Morris:
I am an attorney in private practice who represents claimants as a part of that practice. I am also a FINRA arbitrator, a former registered representative, a former county assistant district attorney, a former state deputy attorney general, and a current member of the Public Arbitration Bar Association (PIABA).
I write to oppose the Proposed Rule Change Amendments and, in fact, to oppose the use of a Discovery Guide as a tool in FINRA arbitration at all. Several attorneys, who are members of PIABA, have stated their reasons for opposing the use of the Discovery Guide in a comprehensive, articulate, and persuasive manner in their published comments to SR-FINRA-2010-035 . Without reiterating their positions, I support the elimination of the Discovery Guide for the following additional reasons:
The Discovery Guide sets the permissible parameters for discovery and the arbitrators, in my experience, deviate very little because arbitrators generally conclude that FINRA must know what is reasonable and relevant or else it would not have established these presumptively discoverable lists.
However, the Discovery Guide is completely backwards, whether by design or chance. It demands information and documents from the investor that are, or should be, irrelevant and yet does not require the firm/associated person to produce documents that are intuitively relevant.
For example, the firm/associated person is supposed to know the customer and recommend only suitable investments. If that is the basic premise, then that should drive the discovery requests and the firm/associated person should provide all those documents requested by and obtained by the firm and/or associated person prior to the firm and/or associated person selling the customer an investment product for the first time and prior to the customer being permitted to purchase an investment with the firm and/or associated person. This would include all tax returns, proof of net worth, proof of investment experience, resume, etc. in the firm/associated persons possession or control. Whatever the firm/associated person did not want or did not feel compelled to obtain before recommending an investment, they should not be permitted to compel after a consumer claim is filed. The know your customer and suitability rules refer to knowing the customer before an investment is recommended, not after the firm/associated person is sued. If the firm/associated person did not get them at the time when they were relevant, they should not get them at all.
Another example: Motive to steal and/or recommend unsuitable investments (including investment with larger than normal commissions) is always an issue. Therefore, associated persons should be required to provide copies of their federal tax returns for each of the three (3) prior years to the opening of the Plaintiffs account, through the date of the filing of the statement of claim. An associated persons financial stability, or absence of same, can provide a motive for that associated person to act improperly. In addition, in order to determine the level of debt the associated person was carrying relative to the level of income the associated person was generating, (and thus to identify financial pressures which may have been brought to bear on the associated person) the associated person should be required to provide copies of mortgages, loans, credit card debt for the period three (3) years prior to the opening of the Plaintiffs account through the date the customer closed the account or the filing of the statement of claim, whichever occurs first.
The foregoing two discovery requirements would go a long way to putting the discovery burden where it belongs. Needless to say, they do not comport with the industrys and with FINRAs notion of how best to limit the number of claims against firms/associated persons and, when filed, limit the recovery against the firms/associated persons. Without a Discovery Guide that is based on the reality of how the industry operates, the discovery system and FINRA arbitration will continue to be unfair to claimants and a boon to those in the industry.
Which begs the question, can FINRA arbitration be fixed? I believe not not in its current conformation. The SRO system is broken and needs to be eliminated. FINRA arbitration is designed by and for the brokerage industry. The branch of government that is supposed to protect the rights granted by the constitution is seemingly content to deny to investors the basic constitutional right of access to the judicial system. FINRA is given free rein by the Securities and Exchange Commission, an agency where a tradition of being a revolving door with a fast track to Wall Street and the riches available there is documented every day in the financial press.
The FINRA mandatory arbitration system provides a pretense of fairness and justice. Those who benefit from it laud it not much of a surprise. Those who are victimized by it dislike it again, no surprise. The surprise? The existence of ostensibly fair minded people who have no problem with forcing individual investors to accept mandatory, involuntary arbitration. What is the premise underlying this paternalistic position? It is that FINRA and its supporters know what is best for investors even if they dont know themselves
Those who praise the arbitration system and yet are afraid to permit an end to forced arbitration, and a return to voluntary arbitration, are being intellectually dishonest. If it is so good for investors why must they be forced to use it? Let investors choose arbitration or court.
The proposed Discovery Guide amendments move the deck chairs around a bit...the ship of individual investor fairness and justice continues on a slow sink to the bottom.
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