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NASD's Arbitration Discovery Guide Clarifies Obligations
here should be less arguing among securities arbitration lawyers now that NASD has implemented its new arbitration discovery "guide" to handle customer disputes. Brokers should know what the guide requires, if for no other reason than to know what to expect the broker's attorney will turn over in discovery to the customer filing an arbitration claim.
The guide sets forth 14 lists of documents that must be produced, unless the objecting party demonstrates good cause why a particular document should not be produced. In terms of timing, the customer, the broker and the firm must provide the documents (or make particular objections) no later than 30 days after the answer to the arbitration claim is due or filed, whichever is earlier.
Additionally, the guide clarifies two other matters. First, the objection that a document is "confidential" will continue to be less and less significant. That is because the guide suggests that, when there is an issue as to whether a document is confidential, the parties (and the arbitrator ruling on an objection) ought to consider a stipulation between the parties that a document will be treated as confidential, and that they will limit its use to the arbitration.
Second, the guide reminds that arbitration is not litigation, at least to the extent that litigation-style "interrogatories" are not permitted. Instead, arbitration-style "requests for information" generally are limited to identifying individuals (e.g., who was the branch manager at the time of the trade?), entities or time periods related to the dispute. The guide states that these requests for information should be "reasonable in number", and should not require "exhaustive answers or fact finding".
What are the 14 lists of documents? Apart from 2 of the 14 lists, which apply to all customer cases, the lists are divided according to the types of allegations made in the arbitration claim. Thus, there are lists for churning cases, for failure to supervise cases, for cases involving misrepresentations and omissions, for cases involving negligence or breach of fiduciary duty, for unauthorized trading cases, and for unsuitability cases.
Let's examine the documents listed for all customer cases. First, the customer must produce the following documents:
- Tax returns, limited to pages 1 and 2 of Form 1040, Schedules B, D and E for three years prior to the first transaction through the date that the arbitration claim was filed;
- For the same period, financial statements or similar statements of assets, liabilities and net worth;
- Documents received from the firm (or any entities in which the customer invested through the firm), including monthly statements, opening account forms, confirmations, prospectuses, annual and periodic reports, and correspondence;
- Account statements and confirmations for accounts at other firms for the time period stated in Number 1;
- Agreements, forms, information or documents relating to the accounts at issue signed by or provided by the customer to the firm or the broker;
- Account analyses and reconciliations prepared by or for the customer relating to the accounts at issue;
- Notes, including entries in calendars and diaries;
- Recordings and notes taken of telephone calls;
- Correspondence between the customer and the firm or broker;
- Previously prepared written statements by persons with knowledge of the facts and circumstances related to the accounts at issue, such as tax advisors and financial planners;
- Prior complaints by the customer against other brokers and firms, and their responses;
- Complaints and Claims by the customer involving securities matters, as well as Answers, Decisions and Awards entered in those cases; and
- Documents showing action taken by the customer to limit losses in the transactions at issue.
That's a hefty set of documents. Now, here is what the broker and the firm must provide to the customer:
- Agreements with the customer, including account opening agreements, discretionary authorization agreements and trading authorizations;
- Account statements;
- Confirmations or, alternatively, confirmations of trades at issue which the customer does not possess;
- Holding or posting pages (or the electronic equivalent) for the customer's account;
- Correspondence between the customer and the firm or broker;
- Notes taken by the firm or broker, including entries in a diary or calendar, relating to the customer's account;
- Recordings and notes of telephone calls or conversations about the customer's account, between the broker and the customer, or between the broker and the firm;
- Forms RE-3, U-4, U-5 (including all amendments), as well as all customer complaints identified in such forms, and all customer complaints of a similar nature against the broker;
- Relevant sections of the firm's compliance manual and supplements thereto, the entire table of contents for each, and bulletins (or other notices) issued by the compliance department;
- Analyses and reconciliations of the customer's account;
- All records of the firm and the broker relating to the customer's account, including internal reports, exception reports and activity reports referencing the customer's account; and
- Records of disciplinary action taken against the broker by any regulator or employer for sales practices or conduct similar to the conduct alleged at issue.
As one can see, that's an equally hefty set of documents to produce. Moreover, there are several nuances. For example, in Item 12, above, it is arguable at what point regulators have "taken action" against a broker.
Make sure that your securities arbitration attorney knows these nuances, and acts as your counsel independent of the firm's interests, which may not be (and often are not) identical to your interests. Nothing less is acceptable for an effective arbitration defense.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
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