Objecting to and Limiting the Use of Regulatory Documents in Arbitration and Litigation Cases
July 31, 2010
By: Clint A. Corrie
Corporate Law and Practice: Securities Arbitration 2010
Broker-dealers and investment advisers (“securities firms”) will periodically find themselves to be the unfortunate interest and/or target of the S.E.C., FINRA, N.A.S.D.R. the MSRB or other regulatory oversight bodies when specific complaints lead to individual broker/adviser investigations, or when general industry concerns lead to firm sweeps. Sometimes, as a condition of a regulatory agreement or settlement, the regulatory authority will require the firm to hire independent consultants to make recommendations to improve their policies, procedures, systems and enforcement. Periodically, securities firms will also voluntarily hire their own consultants, including outside counsel, to conduct internal investigations in response to regulatory audits, or in response to internal firm concerns over controls, systems and processes. Regulatory oversight takes a wide range of remedies from fines, to cease and desist orders, to suspensions, to mandatory internal control review and revision. These orders are typically publicly available and may be found on EDGAR or through the S.E.C. or FINRA websites or other public websites.
The scope of this article addresses what happens, for example, when a securities firm and broker/adviser are sued in court or in arbitration, perhaps years after the regulatory action occurred, over prior policies or practices and, as fate would have it, there is an allegation in the current case or arbitration of the firm’s failure to supervise, failure to generate adequate exception reports, failure of audit procedures, failure of oversight of the broker or adviser activities. When these regulatory documents are sought in discovery or claimants/plaintiffs seek to introduce them at trial or in arbitration, a defense counsel must be resourceful and aggressively object because the mere introduction into evidence of regulatory complaints or actions can have devastating effects on an otherwise defendable case. In litigation, the task of protecting and limiting the use of such reports is easier because of the application of rules of evidence and because errors in the court’s admission of objectionable evidence can be addressed through the appellate process.
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