A vital element of securities arbitration is the method known as "discovery," the pre-hearing exchange of documents applicable to the problems in that case. As in legal proceedings, the parties to a securities arbitration are given an opportunity to obtain from the other side evidence applicable to the problems in the dispute. Discovery in arbitration is more limited than it is in court cases (there are nearly no depositions in arbitration) but it still is critical.
In the initial years of securities arbitration, the parties were pretty much left on their lonesome to fashion discovery requests and arbitrators were given tiny guidance on how to rule on disputes about the proper scope of discovery. Facing complaints about shortage of uniformity, in 1999 the NASD (now called the Financial Industry Regulatory Authority) provided written steerage on discovery issues by issuing Notice to Members 99-90, known then, as now, as the "discovery guide." When FINRA revised its arbitration code in 2007, the beliefs of this guide were assimilated into the FINRA arbitration rules.
Last month, after one or two years of study, FINRA proposed changes to the guide. FINRA is seeking the Securities and Exchange Commission's approval for the changes, and the general public has an opportunity to comment. The Web address for the FINRA suggestion appears at the end of this article; there you'll find a place to post comments. I'm hoping you'll submit a comment to the SEC, and please hurry as comments are due by Aug. 24.
While the proposal is long and the changes obscure, there is one part of the guide that should bother you, the part that demands that every financier who files an arbitration undergo what I have called a "financial colonoscopy." (See "The Usual Wall Street Defenses Are not Working"). In that procedure, the brokerage firms will be authorized to get every document concerning each source of claimant's revenue, each asset the claimant owns, and each investment the complainant has made (for a period of three years pre-dating the complained-of investment). This invasive practice should stop, but if the suggested guide is authorized, the process and its harmful complications will become worse.
The guide is a long document. After one or two pages of general language about discovery, the guide quickly devolves into its essence: catalogues of documents that FINRA denominates "presumptively discoverable." Parties are free to disagree to manufacturing any of the listed items, and they are similarly free to find documents beyond those appearing on the lists. If the attorneys can't work these matters out, the arbitrators are empowered to decide.
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From the investor's point of view, the list is pretty simple. The investor must turn over all of his or her fiscal documents. Each one of them. Individual tax returns, business taxation statements, net worth statements, and account statements for all investments, IRAs and other stocks accounts. If the financier doesn't have it all, the broker will get these documents (and more) from third parties with a subpoena.
In the initial years of securities arbitration, the parties were pretty much left on their lonesome to fashion discovery requests and arbitrators were given tiny guidance on how to rule on disputes about the proper scope of discovery. Facing complaints about shortage of uniformity, in 1999 the NASD (now called the Financial Industry Regulatory Authority) provided written steerage on discovery issues by issuing Notice to Members 99-90, known then, as now, as the "discovery guide." When FINRA revised its arbitration code in 2007, the beliefs of this guide were assimilated into the FINRA arbitration rules.
Last month, after one or two years of study, FINRA proposed changes to the guide. FINRA is seeking the Securities and Exchange Commission's approval for the changes, and the general public has an opportunity to comment. The Web address for the FINRA suggestion appears at the end of this article; there you'll find a place to post comments. I'm hoping you'll submit a comment to the SEC, and please hurry as comments are due by Aug. 24.
While the proposal is long and the changes obscure, there is one part of the guide that should bother you, the part that demands that every financier who files an arbitration undergo what I have called a "financial colonoscopy." (See "The Usual Wall Street Defenses Are not Working"). In that procedure, the brokerage firms will be authorized to get every document concerning each source of claimant's revenue, each asset the claimant owns, and each investment the complainant has made (for a period of three years pre-dating the complained-of investment). This invasive practice should stop, but if the suggested guide is authorized, the process and its harmful complications will become worse.
The guide is a long document. After one or two pages of general language about discovery, the guide quickly devolves into its essence: catalogues of documents that FINRA denominates "presumptively discoverable." Parties are free to disagree to manufacturing any of the listed items, and they are similarly free to find documents beyond those appearing on the lists. If the attorneys can't work these matters out, the arbitrators are empowered to decide.
Special Offer: City bond yields are shrinking fast. Which are the best buys in your state? Click here for updated rankings and recommendations in Forbes ' Tax Advantaged Financier.
From the investor's point of view, the list is pretty simple. The investor must turn over all of his or her fiscal documents. Each one of them. Individual tax returns, business taxation statements, net worth statements, and account statements for all investments, IRAs and other stocks accounts. If the financier doesn't have it all, the broker will get these documents (and more) from third parties with a subpoena.
About the Author:
This article tackles about FINRA arbitration and securities arbitration authored by George Dewey.
