September 8, 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 August 13, 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 former 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 FINRAs 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 modifications, the proposed revisions to the Consolidated FINRA Rulebook would 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 rule change, are as follows:
1. The proposed rule noticeably lacks any definition and/or explanation of what constitutes a recommendation. While it is presumed that the insertion of the term investment strategy into the suitability rule would encompass those situations where a member firm and/or associated person recommends the purchase, sale and/or retention of a security, this presumption can be solidified if either the rule itself or the interpretative material that is associated with the same were to be revised so as to incorporate NYSE Rule 472.10 /09 which defines a recommendation as any advice, suggestion or other statement, written or oral, that is intended, or can reasonably be expected, to influence a customer to purchase, sell or HOLD a security (emphasis added).
2. The proposed rule noticeably lacks any specificity as to whether the obligation to know (and retain) the essential facts concerning every customer would be required to be documented in writing by the member firm which is a material omission that needs to be rectified.
3. The proposed rule noticeably omits the language from NYSE Rule 405 that requires a broker to use due diligence to learn the essential facts relative every order, every cash or margin account, in addition to the information relating to the customer. It should be noted that the omission of this critical language would appear to constitute a significant reduction of the long-standing and well-recognized obligations of member firms and/or associated persons to know their product before recommending the same to their customers and, accordingly, would undermine the protection of the investing public.
Thank you for providing me with the opportunity to submit my comments on this proposed rule.