Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Amendments to the Discovery Guide and Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer Disputes, 45685-45692 [2010-18999]
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NYSEArca–2010–69 and should be
submitted on or before August 24, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.5
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–18998 Filed 8–2–10; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–62584; File No. SR–FINRA–
2010–035]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change Amendments
to the Discovery Guide and Rules
12506 and 12508 of the Code of
Arbitration Procedure for Customer
Disputes
July 28, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 12,
2010, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend the
Discovery Guide, which includes
Document Production Lists, and to
make conforming changes to Rules
12506 and 12508 of the Code of
Arbitration Procedure for Customer
Disputes (‘‘Customer Code’’).
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
5 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
FINRA proposes to revise the
Discovery Guide (‘‘Guide’’) to expand
the guidance FINRA gives to parties and
arbitrators on the discovery process and
to update the Document Production
Lists (‘‘Lists’’). The proposal includes
conforming changes to Rules 12506 and
12508 of the Customer Code.
Background
The SEC approved the current Guide
in 1999 and FINRA made it available for
use in arbitration proceedings involving
customer disputes upon the publication
of Notice to Members (NTM) 99–90
(November 1999). The Guide provides
guidance to parties on which documents
parties should exchange without
arbitrator or staff intervention, and to
arbitrators in determining which
documents customers and member firms
or associated persons are presumptively
required to produce in customer
arbitrations.
In March 2004, FINRA determined to
review the Guide and consider whether
FINRA should update the Guide after
more than four years of use. A FINRA
Advisory Committee, the National
Arbitration and Mediation Committee
(‘‘NAMC’’), conducted the review. The
NAMC is a majority public committee
made up of attorneys who represent
investors, attorneys who represent
brokerage firms, arbitrators, and
mediators. In addition, FINRA staff met
with other frequent users of the forum
representing both the public and the
industry to listen to the concerns of
each side about the current lists, their
proposals for changes, and their
reactions to other constituents’
proposals. FINRA worked for three
years to build a consensus on revisions
to the Guide.
In 2008, FINRA filed a proposed rule
change with the SEC to update the
Guide (‘‘the 2008 proposal’’). The 2008
proposal added clarifying and
conforming language to the introduction
in the Guide and updated the Lists. The
SEC received 53 comment letters on the
2008 proposal that clearly signaled that
the consensus reached on revisions to
the Guide was not broad enough. In
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light of the comment letters, FINRA
withdrew the filing.3
FINRA staff drafted a new Guide
which would replace the current Guide
in its entirety. The starting point was
the 2008 proposal and the comment
letters submitted to the SEC on the 2008
proposal. NAMC members shared the
staff’s draft with interested parties
including, among others, attorneys who
represent investors, in-house counsel at
brokerage firms, and attorneys who
handle investor claims at Law School
clinics. The NAMC recommended that
FINRA appoint a Subcommittee to
review the proposal. The Subcommittee,
comprised of public and industry
NAMC members, reached consensus on
a number of revisions to the Guide. The
NAMC reviewed the Subcommittee’s
recommended changes and agreed to
make additional revisions. The
proposed rule change incorporates the
NAMC’s suggested revisions.
Commenters on the 2008 proposal
suggested that it may be appropriate to
eliminate the Lists for specific types of
claims since claimants are not required
to plead causes of action under the
Customer Code. In response to these
comments, FINRA proposes to replace
the 14 current Lists (two general Lists
and 12 separate Lists for specific types
of claims) with two Lists. The Lists
identify ‘‘presumptively discoverable’’
documents—one for firms/associated
persons to produce and one for
customers to produce. Although each
item on the Lists (with a few exceptions)
would be presumptively discoverable in
every customer case, parties can still
urge that certain documents should not
be discoverable. Likewise, parties can
ask arbitrators to order production of
additional documents that are not on
the Lists. The proposed rule change
emphasizes that arbitrators retain the
flexibility necessary to tailor the Guide
to the facts and circumstances of each
case. This is especially important
because, with the reduction of the Lists
from 14 to two, production is no longer
dependent on the nature of the claim.
Proposed Revisions to the Guide’s
Introduction
FINRA is proposing a number of
revisions to the Guide’s introduction
that expand the guidance given to
parties and arbitrators on the discovery
process generally and clarify how
arbitrators should apply the Guide in
arbitration proceedings.
The current Guide states that it does
not intend to remove the arbitrators’ and
parties’ flexibility in the discovery
3 FINRA filed SR–FINRA 2008–024 on June 11,
2008 and withdrew the filing on May 21, 2009.
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process and that arbitrators can order
parties to produce documents that are
not on the Lists or alter the parties’
production schedule. FINRA would
revise the introduction to add that
arbitrators also can order that parties do
not have to produce certain documents
on the Lists. The proposed revision
would add clarity to the Guide by
indicating that the arbitrator’s flexibility
also includes the ability to order that
parties do not have to produce
particular documents.
FINRA is proposing to add guidance
on how arbitrators should handle
objections based on cost or burden of
production. The introduction would
state that if a party demonstrates that
the cost or burden is disproportionate to
the need for the document, the
arbitrators should determine if the
document is relevant or likely to lead to
relevant evidence. If the arbitrators
determine that the document is relevant
or likely to lead to relevant evidence
they should consider whether there are
alternatives that can lessen the impact
of production, such as narrowing the
time frame or scope of an item, or
determining whether another document
can provide the same information. Since
FINRA is proposing to require
production of most of the List items in
every case, it is important to emphasize
that arbitrators may consider alternative
ways to facilitate discovery. FINRA
believes the discussion will help
arbitrators to balance the parties’
discovery needs with the need to keep
the arbitration process expeditious and
cost effective.
FINRA is proposing to move to the
introduction the content in current
footnote one, which explains that only
parties must produce documents
pursuant to the Guide. FINRA is not
proposing to make any substantive
changes to the content of the footnote.
FINRA is proposing to state that
certain items on the Lists may not be
relevant in a particular case when the
firm’s business model (e.g., full service
firm, discount broker, or online broker)
is considered. FINRA members create
and retain various documents for
business and regulatory purposes.
Depending on how a firm operates, a
particular item on the Lists may or may
not be relevant. The proposed addition
to the introduction would enhance the
Guide because it makes parties and
arbitrators aware that it is appropriate to
recognize firm differences during the
discovery process.
FINRA considers electronic files to be
documents within the meaning of the
Guide. FINRA is proposing to update
the Guide by expressly stating that
electronic files are documents within
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the meaning of the Guide and that
arbitrators shall decide any disputes
that arise about the form in which a
party produces a document.
Commenters on the 2008 proposal
expressed concerns that FINRA does not
give arbitrators and parties enough
guidance about what information they
should treat as confidential. The
commenters asked FINRA to incorporate
into the Guide language from an article
in FINRA’s newsletter for arbitrators
and mediators, the Neutral Corner,4 that
advises arbitrators that the party
asserting confidentiality in the
discovery process has the burden of
establishing that the documents require
confidential treatment and enumerates
factors that arbitrators should consider
when deciding questions about
confidentiality. In response to the
comments, FINRA is proposing to
expand the discussion on
confidentiality in the Guide to include
the statement relating to the burden of
establishing that documents require
confidential treatment and to enumerate
factors that arbitrators should consider
when deciding questions about
confidentiality. The factors include:
• Whether the disclosure would
constitute an unwarranted invasion of
personal privacy (e.g., an individual’s
Social Security number, or medical
information);
• Whether there is a threat of harm
attendant to disclosure of the
information;
• Whether the information contains
proprietary confidential business plans
and procedures or trade secrets;
• Whether the information has
previously been published or produced
without confidentiality or is already in
the public domain;
• Whether an excessively broad
confidentiality order could be against
the public interest or could otherwise
impede the interests of justice; and
• Whether there are legal or ethical
issues which might be raised by
excessive restrictions on the parties.
Currently, if a party states that no
responsive documents for a particular
item ‘‘exist,’’ and the requesting party
asks for an affirmation to that effect, the
responding party is required to make
such an affirmation. FINRA is proposing
to delete the word ‘‘exist’’ and to refer
instead to documents ‘‘in the party’s
possession, custody, or control.’’ FINRA
believes that ‘‘exist’’ is vague and that
the new phrase would add clarity to the
Guide by explaining which documents
4 The article, Arbitrators and Orders of
Confidentiality, The Neutral Corner, April 2004, is
available at: https://www.finra.org/
ArbitrationMediation/Neutrals/Education/
NeutralCorner/P010040.
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parties are required to produce. FINRA
would clarify that, in appropriate cases,
the arbitrators may order a party to
provide an affirmation regarding a
discovery request for documents beyond
those contained in the Guide. FINRA
also proposes to revise the Guide to
emphasize that parties are not required
to create documents in response to
items on the Lists that are not already
in the parties’ possession, custody, or
control.
List 1—Documents the Firm/Associated
Persons Shall Produce in All Customer
Cases
The documents identified in each
numbered item are presumptively
discoverable in every case unless the
item specifically limits production to a
specific type of claim. To distinguish
between customers who are parties to an
arbitration and other customers of a
brokerage firm, the discussion below
refers to customer parties as ‘‘claimants’’
throughout.
Proposed List 1, Item 1—In the
current Guide, firms/associated persons
are required to produce agreements with
claimants relating to account opening
documents, and new account forms,
cash, margin, and option agreements,
trading authorizations, discretionary
authorizations, and powers of attorney
(see current List 1, Item 1). FINRA is
also proposing to expand this item to
require firms/associated persons to
produce account record information
(including the claimants’ names, tax
identification numbers, addresses,
telephone numbers, dates of birth,
employment statuses, annual incomes,
net worth, and account investment
objectives) and documents relating to
the claimants’ risk tolerance. The
account record contains information
about the claimants that the firm
recorded. The record also indicates
whether the associated persons
responsible for the account signed the
record and whether a principal at the
firm approved or accepted the record.
Proposed List 1, Item 2—The current
Guide requires firms/associated persons
to produce all correspondence between
the claimants and the firm/associated
person relating to the transactions at
issue (see current List 1, item 5). Firms/
associated persons are also required to
produce account statements for the
claimants’ accounts (see current List 1,
Item 2) and confirmations for the
claimants’ transactions at issue (see
current List 1, Item 3).
FINRA is proposing to add clarity to
the item by: (1) Specifying that the
required documents are those that were
sent to the claimants or received by the
firm and relate to the accounts or
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transactions at issue; and (2) specifying
that firms/associated persons are
required to produce, among other
documents, those that relate to asset
allocation, diversification, trading
strategies, and market conditions.
Commenters on the 2008 proposal
requested that FINRA require firms/
associated persons to produce statement
inserts and marketing materials if
requested. In response to the
commenters’ request, FINRA proposes
to expand the item to require firms/
associated persons to produce all
advertising materials sent to customers
of the firm that refer to the securities
and/or account types that are at issue.
This addition would provide claimants
with documents the firm disseminated
which advertised the specific products
or account types that are at issue in the
case, without requiring firms to produce
all generic materials sent to all
customers.
FINRA is proposing to eliminate the
requirement that firms/associated
persons produce account statements for
the claimants’ accounts and
confirmations for the claimants’
transactions at issue. In many instances,
the claimants have retained account
statements and/or confirmations, and
requiring production of these
documents in every case adds
unnecessary delay and cost to the
discovery process. If necessary, the
claimants may request these documents
separately.
Proposed List 1, Item 3—FINRA is
proposing to require firms/associated
persons to produce documents
evidencing investment or trading
strategies utilized or recommended in
the claimants’ accounts, including, but
not limited to, options programs, and
any supervisory review of such
strategies. This new item in the Guide
would ensure that claimants have access
to evidence of trading strategies utilized
or recommended that the firm/
associated persons may not have
publicly disseminated. The proposal
also provides claimants with
documentation of any management
supervision over the accounts.
Proposed List 1, Item 4—In the
current Guide, for claims alleging
unauthorized trading, firms/associated
persons are required to produce the
documents they relied on to establish
that claimants authorized the
transactions at issue (See current List
11, Item 3). For claims alleging
unauthorized trading, the proposed
Guide would also require firms/
associated persons to produce all
documents relating to the claimants’
authorization of transactions. This
addition acknowledges that there may
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be documents in addition to those relied
on by the firm that are relevant or could
lead to relevant evidence.
Proposed List 1, Item 5—The current
Guide requires firms/associated persons
to produce, for specified claim types, all
materials prepared or used by the firm/
associated persons relating to the
transactions or products at issue,
including research reports,
prospectuses, and other offering
documents such as documents intended
or identified as being ‘‘for internal use
only,’’ and worksheets or notes
indicating the associated persons
reviewed or read such documents. As an
alternative, the firm/associated persons
may produce a list of such documents
that contains sufficient detail for the
claimants to identify each document
listed. Upon request by a party, the
firm/associated persons are required to
provide any documents identified on
that alternative list (see current List 7
titled Misrepresentation/Omissions, List
9 titled Negligence/Breach of Fiduciary
Duty, and List 13, Item 1 relating to
claims alleging unsuitability).
FINRA is proposing to add clarity to
this item by specifying that, in addition
to materials prepared or used by the
firm/associated persons, the firm/
associated persons must produce the
materials provided to the claimants. The
amendments would also require
production of sales materials and
performance or risk data. FINRA is
proposing to delete the alternative twostep production procedure to reduce
delays in the discovery process.
Proposed List 1, Item 6—The current
Guide requires firms/associated persons
to produce all notes, including entries
in any diary or calendar, relating to the
claimants’ accounts at issue (see current
List 1, Item 6). FINRA is proposing to
expand the scope of the item by
requiring production of notes relating to
the claimants in addition to the
claimants’ accounts or transactions at
issue. For example, notes about the
claimants’ other accounts may provide
evidence in the case.
Proposed List 1, Item 7—The current
Guide requires firms/associated persons
to produce records relating to the
claimants’ accounts at issue, such as
internal reviews and exception and
activity reports, which reference the
claimants’ accounts at issue (see current
List 1, Item 11). FINRA is proposing to
clarify the item by specifying that firms/
associated persons would be required to
produce notes or memoranda
evidencing supervisory, compliance, or
managerial review of the claimants’
accounts or trades for the period at
issue. The item would also require
production of correspondence between
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the claimants and the firm/associated
persons relating to the claimants’
accounts or transactions that bear
indications of managerial, compliance,
or supervisory review of such
correspondence. The Guide would
address exception reports and
supervisory reviews, among other
documents, in proposed Item 13.
Proposed List 1, Item 8—The current
Guide requires firms/associated persons
to produce recordings and notes of
telephone calls or conversations about
the claimants’ accounts at issue that
occurred between the associated
persons and the claimants (see current
List 1, Item 7). FINRA proposes to
expand this item to include telephone
logs. Currently, telephone logs are only
required in cases alleging unauthorized
trading (see current List 11, Item 2).
However, FINRA would narrow the item
from records relating to the claimant’s
‘‘accounts at issue’’ to records relating to
the ‘‘transactions at issue.’’ Producing
recordings of telephone calls is labor
intensive, expensive, and difficult for
firms unless the claimants are able to
specify a telephone call’s date and time,
provide the name of a person the
claimants spoke to at the firm, and/or
specify the trade placed during the
conversation.
Proposed List 1, Item 9—FINRA is
proposing to require firms/associated
persons to produce writings reflecting
communications between the associated
persons assigned to the claimants’
accounts at issue during the time period
at issue and members of the firm’s
compliance department relating to the
securities/products at issue and/or the
claimants’ accounts. FINRA believes
that such writings may provide
evidence relating to, among other
matters, supervision of the associated
persons handling the claimants’
accounts. This item would be new in
the Guide.
Proposed List 1, Item 10—The current
Guide requires firms/associated persons
to produce Forms RE–3, U–4, and U–5,
including all amendments, customer
complaints identified in the forms, and
customer complaints of a similar nature
against the associated persons handling
the accounts at issue (see current List 1,
Item 8).
FINRA proposes to amend this item to
require that firms/associated persons
produce Forms RE–3, U–4, and U–5,
and the Disclosure Reporting Pages for
the associated persons assigned to the
claimants’ accounts at issue during the
time period at issue. Disclosure
Reporting Pages, which are actually part
of Forms U–4 and U–5, provide
claimants with valuable, detailed
information about prior customer
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complaints. FINRA would narrow
production of these forms to the
associated persons assigned to the
claimants’ accounts at issue during the
time period at issue, to ease the burden
of production for the firms. Because of
the sensitive nature of the personal
information, FINRA would permit the
firm to redact the associated persons’
Social Security numbers.
Commenters on the 2008 proposal
requested that FINRA require firms/
associated persons to produce all
customer complaints against the
associated persons. To respond to these
comments, FINRA proposes to require
firms/associated persons to produce all
customer complaints filed against the
associated persons assigned to the
accounts at issue that were generated
between three years prior to the first
transactions at issue through filing of
the Statement of Claim, redacted to
prevent disclosure of nonpublic
personal information about complaining
customers.
Proposed List 1, Item 11—The current
Guide requires firms/associated persons
to produce all sections of the firm’s
Compliance Manuals related to the
claims alleged in the Statement of
Claim, including any separate or
supplemental manuals governing the
duties and responsibilities of the
associated persons and supervisors, any
bulletins (or similar notices) issued by
the compliance department, and the
table of contents and index to each
Manual (see current List 1, Item 9).
FINRA is proposing to amend this
Item to replace compliance manuals
with ‘‘manuals and all updates thereto’’
and compliance department with ‘‘firm.’’
The proposal would clarify that the
firm/associated persons must produce
the manuals regardless of whether the
firm characterizes them as ‘‘compliance
manuals,’’ and firms/associated persons
must produce bulletins from any
department issuing them. FINRA is also
proposing to clarify that production of
manuals, bulletins, and updates is
required for all years in which the
Statement of Claim alleges that the
conduct occurred. Updates are material
to establishing the firm procedures in
place during a specified time frame.
FINRA would also amend the item to
require firms/associated persons to
provide a list of all of manuals and
bulletins which may contain directives
related to the conduct or product at
issue in the claim. The list would enable
claimants to identify any additional
manual or bulletin sections that may be
relevant to their claims.
Proposed List 1, Item 12—The current
Guide requires firms/associated persons
to produce all analyses and
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reconciliations of the claimants’
accounts during the time period and/or
relating to the transactions at issue (see
current List 1, Item 10). FINRA is
proposing to amend this item to clarify
that production is limited to analyses
and reconciliations ‘‘prepared’’ during
the time period at issue, and includes
analyses and reconciliations prepared as
part of a review of the claimants’
accounts or transactions at issue. These
documents are valuable because they
may contain firm findings concerning
reviews of claimants’ accounts.
Proposed List 1, Item 13—For claims
alleging failure to supervise, the current
Guide requires the production of all
exception reports and supervisory
activity reviews relating to the
associated persons and/or the claimants’
accounts generated not earlier than one
year before or not later than one year
after the transactions at issue, and all
other documents reflecting supervision
of the associated persons and the
claimants’ accounts (see current List 5,
Item 2).
FINRA is proposing to require firms/
associated persons to produce all
exception reports, supervisory activity
reviews, concentration reports, active
account runs, and similar documents
produced to review for activity in the
claimants’ accounts related to the
allegations in the Statement of Claim or
in which the transactions at issue are
referenced or listed.
For claims alleging failure to
supervise, FINRA is proposing to
expand production beyond the review
of activity in the claimants’ accounts
also to cover other customer accounts
handled by associated persons at the
firm. In such cases, FINRA is proposing
to require firms/associated persons to
produce all exception reports,
supervisory activity reviews,
concentration reports, active account
runs, and similar documents produced
to review for activity in customer
accounts handled by associated persons
and related to the allegations in the
Statement of Claim that were generated
not earlier than one year before or not
later than one year after the transactions
at issue.
FINRA would limit production to
documents related to the allegations
made in the Statement of Claim to ease
the burden of production for firms/
associated persons. FINRA believes that
narrowing the item would not
negatively impact claimants because
firms/associated persons would
continue to produce reports related to
the claimants’ claims.
Proposed List 1, Item 14—For claims
alleging failure to supervise, the current
Guide requires production of the
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portions of internal audit reports at the
branch in which the claimants
maintained accounts that focused on the
associated persons or the transactions at
issue, and were generated not earlier
than one year before or not later than
one year after the transactions at issue
and discussed alleged improper
behavior in the branch against other
individuals similar to the improper
conduct alleged in the Statement of
Claim (see current List 5, Item 3).
FINRA is not proposing any substantive
changes to this Item.
Proposed List 1, Item 15—The current
Guide requires the production of
records of disciplinary action taken
against associated persons by any
regulator or employer for all sales
practice violations or conduct similar to
the conduct alleged to be at issue (see
current List 1, Item 12). FINRA is not
proposing any substantive changes to
this item.
Proposed List 1, Item 16—FINRA is
proposing to require firms/associated
persons to produce all investigations,
charges, or findings by any regulator
(state, federal or self-regulatory
organization) and the firm/associated
persons’ responses to such
investigations, charges, or findings for
the associated persons’ alleged improper
behavior similar to that alleged in the
Statement of Claim. This new item in
the Guide would expand the scope of
documents that relate to the associated
persons’ disciplinary history.
Proposed List 1, Item 17—For claims
alleging failure to supervise, the current
Guide requires production of the
portions of examination reports or
similar reports following an
examination or an inspection conducted
by a state or federal agency or a selfregulatory organization that focused on
the associated persons or the
transactions at issue or that discussed
alleged improper behavior in the branch
against other individuals similar to the
improper conduct alleged in the
Statement of Claim (see current List 5,
Item 4). Commenters on the 2008
proposal requested that FINRA include
a time limit for production of these
documents. In response to these
comments, FINRA is proposing to limit
production to those reports issued for
the period one year before the
transactions at issue through the filing
of the Statement of Claim. FINRA
believes that restricting the time frame
for production would reduce the firms’
burden of production and offset the
expansion of this production to all cases
while ensuring that claimants have
access to the reports that relate to their
claims.
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Proposed List 1, Item 18—FINRA is
proposing to require firms/associated
persons to produce documents the
respondents obtained by subpoena or by
document requests directed to third
parties. While this item would be new
in the Guide, it is not a new requirement
because the subpoena rule, Rule
12512(e), already requires production of
subpoenaed documents. FINRA is
proposing to cross-reference that rule in
the Guide. FINRA would also add
documents received by request directed
to third parties at any time during the
case to ensure that all parties have
access to documents obtained without a
subpoena from non-parties.
Proposed List 1, Items 19, 20, and
21—In the current Guide, firms/
associated persons are required to
produce documents relating to
associated persons’ commissions and/or
compensation when claimants allege
churning (see current List 3, Items 1–3),
failure to supervise (see current List 5,
Item 1), or unsuitability (see current List
13, Item 2).
Proposed List 1, Item 19—FINRA is
proposing to require firms/associated
persons to produce documents showing
the associated persons’ gross and net
compensation for the transactions at
issue in the Statement of Claim. This is
new in the Guide. Documentation of
compensation on an order-by-order
basis provides parties with a clear
understanding of how much firms paid
associated persons for the trading at
issue. If the accounts at issue were the
subject of fee arrangements that are not
based on remuneration per trade, firms/
associated persons would be required to
produce a record of compensation
earned for the period when the
transactions in the accounts took place.
Proposed List 1, Item 20—The current
Guide requires firms/associated persons
to produce commission runs relating to
the claimants’ accounts at issue or, in
the alternative, a consolidated
commission report relating to the
accounts (see current List 3, Item 1). It
also requires firms/associated persons to
produce documents reflecting
compensation of any kind, including
commissions, from all sources generated
by the associated persons assigned to
the claimants’ accounts for the two
months preceding, through the two
months following, the transactions at
issue, or up to 12 months, whichever is
longer. The firm may redact all
information identifying customers who
are not parties to the action except for
the last four digits of the non-party
customer account number for each
transaction (see current List 3, Item 2).
In addition, for claims related to
solicited trading activity, FINRA is
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proposing to require the firm/associated
persons to produce a record of all
compensation, monetary and nonmonetary, including, but not limited to,
monthly commission runs for the
associated persons who handled the
claimants’ accounts. That record should
reflect the securities traded, dates
traded, whether the trades were
solicited or unsolicited, and the gross
and net commission from each trade.
Firms would be required to produce this
record for a period of time beginning
three months before and ending three
months after the trades at issue in the
claimants’ accounts. FINRA is
proposing to impose this additional
production only in claims relating to
solicited trading activity because the
records would be most relevant to such
activity. The required documents may
provide claimants with evidence
regarding the extent to which the
associated person recommended
securities to other customers.
The firm may redact names and other
non-public personal information
concerning customers who are not
parties to this claim, but would be
required to provide sufficient
information to identify: (1) The nonparty customers’ accounts, including the
last four digits of the non-party
customers’ account numbers; (2) the
associated persons’ own and related
accounts, including the last four digits
of the associated persons’ account
numbers; and (3) the type of account
(IRA, 401(k), etc.). Activity in the
associated persons’ account may be
correlated to the transactions in the
customers’ accounts.
Proposed List 1, Item 21—The current
Guide requires firms/associated persons
to produce documents describing the
basis upon which the firm compensated
the associated persons during the years
in which the transactions or occurrences
in question occurred, including any
bonus or incentive program, and
compensation and commission
schedules (see current List 3, Item 3 and
current List 13, Item 2). FINRA would
add clarity to this item by requiring
production of a record of all agreements
pertaining to the relationship between
the associated person and the firm,
summarizing the associated person’s
compensation arrangement or plan with
the firm, including commission and
concession schedules, bonus or
incentive plans, and schedules showing
compensation. If the firm based the
associated persons’ compensation on
factors other than remuneration per
trade, the item would require
documentation of the method by which
compensation was determined.
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Proposed List 1, Item 22—For claims
with allegations relating to an insurance
product that includes a death benefit,
FINRA is proposing to require firms/
associated persons to produce all
information concerning the claimants’
insurance holdings and the
recommendations, if any, to the
claimants regarding insurance products.
This new requirement in the Guide
could provide parties with evidence in
cases involving annuities.
Items Firms/Associated Persons Would
No Longer Be Required To Produce
Holding Pages—In the current Guide,
firms/associated persons are required to
produce holding pages for the
claimants’ accounts at issue (see current
List 1, Item 4). FINRA is proposing to
delete this item from the Guide because
holding pages (hand written records of
transactions made and kept by
associated persons) are, generally, no
longer in use. Firms provide transaction
information to customers on account
statements and/or confirmations.
Order tickets—In the current Guide,
firms/associated persons are required to
produce order tickets for the claimants’
transactions in cases alleging
unauthorized trading (see current List
11, Item 1). FINRA is proposing to
delete this requirement from the Guide
because production of order tickets is
burdensome and evidence relating to
whether the claimants authorized a
particular transaction would be
produced under proposed List 1, Items
4, 6, and 8.
List 2—Documents the Customers Shall
Produce in All Customer Cases
The documents identified in each
numbered item are presumptively
discoverable in every case unless the
item specifically limits production to a
specific type of claim.
As stated above, to distinguish
between customers who are parties to an
arbitration and other customers of a
brokerage firm, the discussion below
refers to customer parties as ‘‘claimants’’
throughout.
Proposed List 2, Item 1—In the
current Guide, claimants are required to
produce all claimant and claimantowned business (including partnership
or corporate) federal income tax returns,
limited to pages 1 and 2 of Form 1040,
Schedules B, D, and E, or the equivalent
for any other type of return, for the three
years prior to the first transaction at
issue in the Statement of Claim through
the date the Statement of Claim was
filed (see current List 2, Item 1). FINRA
is proposing to expand this item to
require production of Form 1040
schedule A and the IRS worksheets
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related to Schedules A, B, D, and E. The
expanded production would provide
parties with a broader understanding of
the claimants’ financial status and
investment activity during the relevant
period. The amendments would provide
that the income tax returns must be
identical to those that the claimants
filed with the Internal Revenue Service.
Because of the sensitive nature of the
personal information, FINRA would
permit claimants to redact their Social
Security numbers. FINRA would also
permit claimants to redact information
relating to medical and dental expenses
and the names of charities on Schedule
A unless the information relates to the
allegations in the Statement of Claim.
Proposed List 2, Item 2—The current
Guide requires claimants to produce
financial statements or similar
statements of the claimants’ assets,
liabilities, and/or net worth for the
period covering the three years prior to
the first transaction at issue in the
Statement of Claim through the date the
claimants filed the Statement of Claim
(see current List 2, Item 2). FINRA is
proposing to add clarity to this item by
specifying that financial statements
include statements within a loan
application. The item would also
provide that claimants are not required
to create financial statements in order to
comply with the item.
Proposed List 2, Item 3—The current
Guide requires claimants to produce
copies of all documents received from
the firm/associated persons and from
any entities in which the claimants
invested through the firm/associated
persons, including monthly statements,
opening account forms, confirmations,
prospectuses, annual and periodic
reports, and correspondence (see
current List 2, Item 3). FINRA is
proposing to expand this item to
include research reports. Research
reports may provide evidence
concerning the basis for the claimants’
investment decisions.
FINRA is proposing to eliminate
mandatory production of account
statements and confirmations if
claimants stipulate to having received
them. The amendments would require
claimants to produce any statements or
confirmations with hand written
notations on them or which are not
identical to those sent by the firm. The
amendments would decrease claimants’
discovery costs while preserving the
requirement to produce documents that
may have probative value.
Proposed List 2, Item 4—The current
Guide requires claimants to produce
account statements and confirmations
for accounts maintained at securities
firms other than the respondent firm for
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the three years prior to the first
transaction at issue in the Statement of
Claim through the date the claimants
filed the Statement of Claim (see current
List 2, Item 4). FINRA is proposing to
amend this item to permit claimants to
provide written authorization allowing
the firm/associated persons to obtain
account statements directly from the
securities firms instead of providing
copies of the statements. If the claimants
elect to provide written authorization to
the firm/associated persons to obtain the
account statements, the claimants
would still be required to provide all
account statements in the claimants’
possession, custody, or control with
hand written notations on them or
which are not identical to those sent by
the firm. The proposal would ensure
that other parties to the matter have a
complete understanding of the
claimants’ investing history. FINRA
proposes to eliminate confirmations
from the item to ease the burden for
investors. If necessary, firms would be
able to request confirmations separately.
Proposed List 2, Item 5—The current
Guide requires claimants to produce
agreements, forms, information, or
documents relating to the accounts at
issue signed by or provided by the
claimants to the firm/associated persons
(see current List 2, Item 5). FINRA is
proposing to expand the scope of this
item by requiring production of
documents relating to accounts or
transactions at the firm regardless of
whether claimants signed the
documents.
Proposed List 2, Item 6—The current
Guide requires claimants to produce
account analyses and reconciliations
prepared by or for the claimants relating
to the accounts at issue (see current List
2, Item 6). FINRA is proposing to
provide clarity to this item by changing
‘‘the account(s) at issue’’ to ‘‘the accounts
at the respondent firm or transactions
with the respondent firm during the
time period at issue.’’
Proposed List 2, Item 7—The current
Guide requires claimants to produce
notes, including entries in diaries or
calendars, relating to the accounts at
issue (see current List 2, Item 7). FINRA
is proposing to amend this item to
provide clarity by changing ‘‘the
account(s) at issue’’ to ‘‘accounts at the
respondent firm or transactions at issue
with the respondent firm.’’
Proposed List 2, Item 8—The current
Guide requires claimants to produce
recordings and notes of telephone calls
or conversations about the claimants’
accounts at issue that occurred between
the associated persons and the
claimants (and any person purporting to
act on behalf of the claimants) (see
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current List 2, Item 8). For claims
alleging unauthorized trading, claimants
are also required to produce telephone
records, including telephone logs,
evidencing telephonic contact between
the claimants and the firm/associated
persons (see current List 12, Item 1).
FINRA is proposing to combine these
items into new Item 8. FINRA is not
proposing any substantive changes to
the items.
Proposed List 2, Item 9—The current
Guide requires claimants to produce
correspondence between the claimants
(and any person acting on behalf of the
claimants) and the firm/associated
persons relating to the accounts at issue
(see current List 2, Item 9). FINRA is
proposing to amend this item to broaden
the scope of production by deleting the
reference to firm/associated persons.
The claimants may have corresponded
with persons/entities unrelated to the
firm concerning the transactions at
issue.
Proposed List 2, Item 10—The current
Guide requires claimants to produce
previously prepared written statements
by persons with knowledge of the facts
and circumstances related to the
accounts at issue, including those by
accountants, tax advisors, financial
planners, other associated persons, and
any other third party (see current List 2,
Item 10). FINRA is not proposing any
substantive changes to the current item.
Proposed List 2, Item 11—The current
Guide requires claimants to produce
complaints/Statements of Claim and
answers filed in all civil actions
involving securities matters and
securities arbitration proceedings, and
all final decisions and awards entered in
these matters (see current List 2, Item
12). FINRA is proposing to expand the
scope of this item by requiring
claimants to produce non-confidential
settlements entered in these matters
because the subject matter of nonconfidential settlements may be relevant
to the pending case. The item would
specify that claimants must produce the
documents for all claims or complaints
filed prior to the filing of the current
Statement of Claim.
FINRA is also proposing to add that,
if a person is party to a confidential
settlement agreement that by its terms
does not preclude identification of the
existence of the settlement agreement,
the party must identify the documents
comprising the confidential settlement
agreement. The proposed change would
state that, although not presumptively
discoverable, the panel could order the
claimants to produce a confidential
settlement agreement. The proposal
would ensure that parties are aware of
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other securities actions in which the
claimants were parties.
Proposed List 2, Item 12—For claims
alleging misrepresentation/omissions
(see current List 8, Item 1), negligence/
breach of fiduciary duty (see current
List 10, item 1), or unsuitability (see
current List 14, Item 1), the current
Guide requires claimants to produce
documents showing the claimants’
ownership in or control over any
business entity, including general and
limited partnerships and closely held
corporations. FINRA is proposing to
expand the scope of this item to require
that if the claimants are Trustees, they
must also provide documents showing
all accounts over which they have
trading authority. The Trustees’ trading
activity for other accounts may provide
evidence of the Trustees’ investment
sophistication.
Proposed List 2, Item 13—For claims
alleging unsuitability, the current Guide
requires claimants to produce written
documents they relied upon in making
the investment decisions at issue (see
current List 14, Item 2). FINRA is
proposing to delete the reference to
‘‘documents relied upon’’ and require
production of all documents the
claimants ‘‘received, including
documents found through the claimants’
own efforts, relating to the investments
at issue.’’ Documents the claimants
received that relate to the investment at
issue could provide relevant evidence in
a case even if the claimants did not rely
on them in making an investment
decision.
Proposed List 2, Item 14—For claims
alleging unauthorized trading, the
current Guide requires claimants to
produce documents relied on to show
that transactions were made without the
claimants’ knowledge or consent (see
current List 12, Item 2). FINRA is not
proposing any substantive changes to
the item and is proposing to limit the
item to claims alleging unauthorized
trading.
Proposed List 2, Item 15—FINRA is
proposing to require claimants to
produce all materials received or
obtained from any source relating to the
transactions or products at issue, and
other investment opportunities,
including research reports, sales
literature, performance or risk data,
prospectuses, and other offering
documents, including documents
intended or identified as being ‘‘for
internal use only,’’ and worksheets or
notes. This item would be new in the
Guide. Production of these documents
may provide evidence concerning the
bases for claimants’ trading decisions.
Therefore, FINRA also is proposing to
require claimants to produce any similar
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materials received or obtained relating
to other investment opportunities.
Proposed List 2, Item 16—For claims
alleging misrepresentation/omission
(see current List 8, Item 2), negligence/
breach of fiduciary duty (see current
List 10, Item 2), or unsuitability (see
current List 14, Item 3), claimants are
required to produce a copy of their
resumes. While FINRA is not proposing
any substantive changes to the item,
claimants would be required to produce
the documents in every case.
Proposed List 2, Item 17—For claims
alleging misrepresentation/omission
(see current List 8, Item 3), negligence/
breach of fiduciary duty (see current
List 10, Item 3), or unsuitability (see
current List 14, Item 4), claimants are
required to produce documents showing
their educational and employment
background, or a description of their
background if not set forth in a resume.
While FINRA is not proposing any
substantive changes to the item,
claimants would be required to produce
the documents in every case.
Proposed List 2, Item 18—FINRA is
proposing to require claimants to
produce documents the claimants
obtained by subpoena or by document
requests directed to third parties. While
this item would be new in the Guide, it
is not a new requirement because the
subpoena rule, Rule 12512(e), already
requires production of subpoenaed
documents. FINRA is proposing to
cross-reference that rule in the Guide.
FINRA would also add documents
received by request directed to third
parties at any time during the case, to
ensure that all parties have access to
documents obtained without a subpoena
from non-parties.
Proposed List 2, Item 19—For claims
involving an insurance product that
provides a death benefit, FINRA is
proposing to require claimants to
produce all insurance information
received from an insurance sales agent
or securities broker relating to the
insurance. This new requirement in the
Guide could provide parties with
evidence that may be relevant in cases
involving annuities.
Items Customers Would No Longer Be
Required To Produce
Claimants’ complaints—The current
Guide requires claimants to produce all
prior complaints by or on behalf of the
claimants involving securities matters
and the firm’s/associated persons’
responses (see current List 2, Item 11).
FINRA is proposing to delete this item
as unnecessary because the respondent
firm/associated persons would be in
possession of such complaints and any
responsive documents.
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45691
Claimants’ action to limit losses—The
current Guide requires claimants to
produce all documents showing action
taken by the claimants to limit losses in
the transactions at issue (see current List
2, Item 13). FINRA is proposing to
delete this item because, in most
instances, the firm/associated persons
are in possession of any documents that
would be responsive to this item. If
necessary, firms would be able to
request additional documents.
Conforming Changes
FINRA is proposing to amend Rules
12506 (Document Production Lists) and
12508 (Objecting to Discovery; Waiver
of Objection) to remove references to
Lists three through 14 since FINRA
would delete these lists in the proposed
Guide.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,5 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that
these revisions to the Guide will reduce
the number and limit the scope of
disputes involving document
production and other matters, thereby
improving the arbitration process for the
benefit of the public investors, brokerdealer firms, and associated persons
who use the process.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
5 15
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U.S.C. 78o–3(b)(6).
03AUN1
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(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2010–035 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2010–035. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2010–035 and
should be submitted on or before
August 24, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–18999 Filed 8–2–10; 8:45 am]
BILLING CODE 8010–01–P
SOCIAL SECURITY ADMINISTRATION
Agency Information Collection
Activities: Proposed Request,
Comment Request
The Social Security Administration
(SSA) publishes a list of information
collection packages requiring clearance
by the Office of Management and
Budget (OMB) in compliance with
Public Law (Pub. L.) 104–13, the
Paperwork Reduction Act of 1995,
effective October 1, 1995. This notice
includes extensions of OMB-approved
information collections.
SSA is soliciting comments on the
accuracy of the agency’s burden
Number of
respondents
Collection method
estimate; the need for the information;
its practical utility; ways to enhance its
quality, utility, and clarity; and ways to
minimize burden on respondents,
including the use of automated
collection techniques or other forms of
information technology. Mail, email, or
fax your comments and
recommendations on the information
collection(s) to the OMB Desk Officer
and SSA Reports Clearance Director to
the following addresses or fax numbers.
(OMB), Office of Management and
Budget, Attn: Desk Officer for SSA,
Fax: 202–395–6974, E-mail address:
OIRA_Submission@omb.eop.gov.
(SSA), Social Security Administration,
DCBFM, Attn: Reports Clearance
Officer, 1333 Annex Building, 6401
Security Blvd., Baltimore, MD 21235,
Fax: 410–965–6400, E-mail address:
OPLM.RCO@ssa.gov.
I. The information collection below is
pending at SSA. SSA will submit it to
OMB within 60 days from the date of
this notice. To be sure we consider your
comments, we must receive them no
later than October 4, 2010. Individuals
can obtain copies of the collection
instruments by calling the SSA Director
for Reports Clearance at 410–965–0454
or by writing to the above e-mail
address.
Work History Report—20 CFR
404.1515, 404.1560, 404.1565, 416.960
and 416.965–0960–0578. Under certain
circumstances, SSA asks individuals
about work they have performed in the
past. Applicants use Form SSA–3369 to
provide detailed information about jobs
held prior to becoming unable to work.
State Disability Determination Services
evaluate the information, together with
medical evidence, to determine
eligibility for disability.
Type of Request: Revision of an OMBapproved information collection.
Average
burden per
response
(hours)
Frequency
of response
Estimated
annual
burden hours
1,090,346
607,122
1
1
1
1
1,090,346
607,122
Totals ........................................................................................................
erowe on DSK5CLS3C1PROD with NOTICES
SSA–3369 (Paper form) ..................................................................................
EDCS 3369 ......................................................................................................
1,697,468
........................
........................
1,697,468
II. SSA has submitted the information
collections listed below to OMB for
clearance. Your comments on the
information collections would be most
useful if OMB and SSA receive them
within 30 days from the date of this
6 17
publication. To be sure we consider
your comments, we must receive them
no later than September 2, 2010. You
can obtain a copy of the OMB clearance
packages by calling the SSA Director for
Reports Clearance at 410–965–0454 or
by writing to the above e-mail address.
Application for Child’s Insurance
Benefits—20 CFR 404.350–404.368,
404.603, & 416.350—0960–0010. SSA
uses Form SSA–4–BK to determine if
CFR 200.30–3(a)(12).
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E:\FR\FM\03AUN1.SGM
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]]>Agencies
[Federal Register Volume 75, Number 148 (Tuesday, August 3, 2010)]
[Notices]
[Pages 45685-45692]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-18999]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62584; File No. SR-FINRA-2010-035]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Amendments to
the Discovery Guide and Rules 12506 and 12508 of the Code of
Arbitration Procedure for Customer Disputes
July 28, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 12, 2010, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the Discovery Guide, which includes
Document Production Lists, and to make conforming changes to Rules
12506 and 12508 of the Code of Arbitration Procedure for Customer
Disputes (``Customer Code'').
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to revise the Discovery Guide (``Guide'') to expand
the guidance FINRA gives to parties and arbitrators on the discovery
process and to update the Document Production Lists (``Lists''). The
proposal includes conforming changes to Rules 12506 and 12508 of the
Customer Code.
Background
The SEC approved the current Guide in 1999 and FINRA made it
available for use in arbitration proceedings involving customer
disputes upon the publication of Notice to Members (NTM) 99-90
(November 1999). The Guide provides guidance to parties on which
documents parties should exchange without arbitrator or staff
intervention, and to arbitrators in determining which documents
customers and member firms or associated persons are presumptively
required to produce in customer arbitrations.
In March 2004, FINRA determined to review the Guide and consider
whether FINRA should update the Guide after more than four years of
use. A FINRA Advisory Committee, the National Arbitration and Mediation
Committee (``NAMC''), conducted the review. The NAMC is a majority
public committee made up of attorneys who represent investors,
attorneys who represent brokerage firms, arbitrators, and mediators. In
addition, FINRA staff met with other frequent users of the forum
representing both the public and the industry to listen to the concerns
of each side about the current lists, their proposals for changes, and
their reactions to other constituents' proposals. FINRA worked for
three years to build a consensus on revisions to the Guide.
In 2008, FINRA filed a proposed rule change with the SEC to update
the Guide (``the 2008 proposal''). The 2008 proposal added clarifying
and conforming language to the introduction in the Guide and updated
the Lists. The SEC received 53 comment letters on the 2008 proposal
that clearly signaled that the consensus reached on revisions to the
Guide was not broad enough. In light of the comment letters, FINRA
withdrew the filing.\3\
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\3\ FINRA filed SR-FINRA 2008-024 on June 11, 2008 and withdrew
the filing on May 21, 2009.
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FINRA staff drafted a new Guide which would replace the current
Guide in its entirety. The starting point was the 2008 proposal and the
comment letters submitted to the SEC on the 2008 proposal. NAMC members
shared the staff's draft with interested parties including, among
others, attorneys who represent investors, in-house counsel at
brokerage firms, and attorneys who handle investor claims at Law School
clinics. The NAMC recommended that FINRA appoint a Subcommittee to
review the proposal. The Subcommittee, comprised of public and industry
NAMC members, reached consensus on a number of revisions to the Guide.
The NAMC reviewed the Subcommittee's recommended changes and agreed to
make additional revisions. The proposed rule change incorporates the
NAMC's suggested revisions.
Commenters on the 2008 proposal suggested that it may be
appropriate to eliminate the Lists for specific types of claims since
claimants are not required to plead causes of action under the Customer
Code. In response to these comments, FINRA proposes to replace the 14
current Lists (two general Lists and 12 separate Lists for specific
types of claims) with two Lists. The Lists identify ``presumptively
discoverable'' documents--one for firms/associated persons to produce
and one for customers to produce. Although each item on the Lists (with
a few exceptions) would be presumptively discoverable in every customer
case, parties can still urge that certain documents should not be
discoverable. Likewise, parties can ask arbitrators to order production
of additional documents that are not on the Lists. The proposed rule
change emphasizes that arbitrators retain the flexibility necessary to
tailor the Guide to the facts and circumstances of each case. This is
especially important because, with the reduction of the Lists from 14
to two, production is no longer dependent on the nature of the claim.
Proposed Revisions to the Guide's Introduction
FINRA is proposing a number of revisions to the Guide's
introduction that expand the guidance given to parties and arbitrators
on the discovery process generally and clarify how arbitrators should
apply the Guide in arbitration proceedings.
The current Guide states that it does not intend to remove the
arbitrators' and parties' flexibility in the discovery
[[Page 45686]]
process and that arbitrators can order parties to produce documents
that are not on the Lists or alter the parties' production schedule.
FINRA would revise the introduction to add that arbitrators also can
order that parties do not have to produce certain documents on the
Lists. The proposed revision would add clarity to the Guide by
indicating that the arbitrator's flexibility also includes the ability
to order that parties do not have to produce particular documents.
FINRA is proposing to add guidance on how arbitrators should handle
objections based on cost or burden of production. The introduction
would state that if a party demonstrates that the cost or burden is
disproportionate to the need for the document, the arbitrators should
determine if the document is relevant or likely to lead to relevant
evidence. If the arbitrators determine that the document is relevant or
likely to lead to relevant evidence they should consider whether there
are alternatives that can lessen the impact of production, such as
narrowing the time frame or scope of an item, or determining whether
another document can provide the same information. Since FINRA is
proposing to require production of most of the List items in every
case, it is important to emphasize that arbitrators may consider
alternative ways to facilitate discovery. FINRA believes the discussion
will help arbitrators to balance the parties' discovery needs with the
need to keep the arbitration process expeditious and cost effective.
FINRA is proposing to move to the introduction the content in
current footnote one, which explains that only parties must produce
documents pursuant to the Guide. FINRA is not proposing to make any
substantive changes to the content of the footnote.
FINRA is proposing to state that certain items on the Lists may not
be relevant in a particular case when the firm's business model (e.g.,
full service firm, discount broker, or online broker) is considered.
FINRA members create and retain various documents for business and
regulatory purposes. Depending on how a firm operates, a particular
item on the Lists may or may not be relevant. The proposed addition to
the introduction would enhance the Guide because it makes parties and
arbitrators aware that it is appropriate to recognize firm differences
during the discovery process.
FINRA considers electronic files to be documents within the meaning
of the Guide. FINRA is proposing to update the Guide by expressly
stating that electronic files are documents within the meaning of the
Guide and that arbitrators shall decide any disputes that arise about
the form in which a party produces a document.
Commenters on the 2008 proposal expressed concerns that FINRA does
not give arbitrators and parties enough guidance about what information
they should treat as confidential. The commenters asked FINRA to
incorporate into the Guide language from an article in FINRA's
newsletter for arbitrators and mediators, the Neutral Corner,\4\ that
advises arbitrators that the party asserting confidentiality in the
discovery process has the burden of establishing that the documents
require confidential treatment and enumerates factors that arbitrators
should consider when deciding questions about confidentiality. In
response to the comments, FINRA is proposing to expand the discussion
on confidentiality in the Guide to include the statement relating to
the burden of establishing that documents require confidential
treatment and to enumerate factors that arbitrators should consider
when deciding questions about confidentiality. The factors include:
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\4\ The article, Arbitrators and Orders of Confidentiality, The
Neutral Corner, April 2004, is available at: https://www.finra.org/ArbitrationMediation/Neutrals/Education/NeutralCorner/P010040.
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Whether the disclosure would constitute an unwarranted
invasion of personal privacy (e.g., an individual's Social Security
number, or medical information);
Whether there is a threat of harm attendant to disclosure
of the information;
Whether the information contains proprietary confidential
business plans and procedures or trade secrets;
Whether the information has previously been published or
produced without confidentiality or is already in the public domain;
Whether an excessively broad confidentiality order could
be against the public interest or could otherwise impede the interests
of justice; and
Whether there are legal or ethical issues which might be
raised by excessive restrictions on the parties.
Currently, if a party states that no responsive documents for a
particular item ``exist,'' and the requesting party asks for an
affirmation to that effect, the responding party is required to make
such an affirmation. FINRA is proposing to delete the word ``exist''
and to refer instead to documents ``in the party's possession, custody,
or control.'' FINRA believes that ``exist'' is vague and that the new
phrase would add clarity to the Guide by explaining which documents
parties are required to produce. FINRA would clarify that, in
appropriate cases, the arbitrators may order a party to provide an
affirmation regarding a discovery request for documents beyond those
contained in the Guide. FINRA also proposes to revise the Guide to
emphasize that parties are not required to create documents in response
to items on the Lists that are not already in the parties' possession,
custody, or control.
List 1--Documents the Firm/Associated Persons Shall Produce in All
Customer Cases
The documents identified in each numbered item are presumptively
discoverable in every case unless the item specifically limits
production to a specific type of claim. To distinguish between
customers who are parties to an arbitration and other customers of a
brokerage firm, the discussion below refers to customer parties as
``claimants'' throughout.
Proposed List 1, Item 1--In the current Guide, firms/associated
persons are required to produce agreements with claimants relating to
account opening documents, and new account forms, cash, margin, and
option agreements, trading authorizations, discretionary
authorizations, and powers of attorney (see current List 1, Item 1).
FINRA is also proposing to expand this item to require firms/associated
persons to produce account record information (including the claimants'
names, tax identification numbers, addresses, telephone numbers, dates
of birth, employment statuses, annual incomes, net worth, and account
investment objectives) and documents relating to the claimants' risk
tolerance. The account record contains information about the claimants
that the firm recorded. The record also indicates whether the
associated persons responsible for the account signed the record and
whether a principal at the firm approved or accepted the record.
Proposed List 1, Item 2--The current Guide requires firms/
associated persons to produce all correspondence between the claimants
and the firm/associated person relating to the transactions at issue
(see current List 1, item 5). Firms/associated persons are also
required to produce account statements for the claimants' accounts (see
current List 1, Item 2) and confirmations for the claimants'
transactions at issue (see current List 1, Item 3).
FINRA is proposing to add clarity to the item by: (1) Specifying
that the required documents are those that were sent to the claimants
or received by the firm and relate to the accounts or
[[Page 45687]]
transactions at issue; and (2) specifying that firms/associated persons
are required to produce, among other documents, those that relate to
asset allocation, diversification, trading strategies, and market
conditions.
Commenters on the 2008 proposal requested that FINRA require firms/
associated persons to produce statement inserts and marketing materials
if requested. In response to the commenters' request, FINRA proposes to
expand the item to require firms/associated persons to produce all
advertising materials sent to customers of the firm that refer to the
securities and/or account types that are at issue. This addition would
provide claimants with documents the firm disseminated which advertised
the specific products or account types that are at issue in the case,
without requiring firms to produce all generic materials sent to all
customers.
FINRA is proposing to eliminate the requirement that firms/
associated persons produce account statements for the claimants'
accounts and confirmations for the claimants' transactions at issue. In
many instances, the claimants have retained account statements and/or
confirmations, and requiring production of these documents in every
case adds unnecessary delay and cost to the discovery process. If
necessary, the claimants may request these documents separately.
Proposed List 1, Item 3--FINRA is proposing to require firms/
associated persons to produce documents evidencing investment or
trading strategies utilized or recommended in the claimants' accounts,
including, but not limited to, options programs, and any supervisory
review of such strategies. This new item in the Guide would ensure that
claimants have access to evidence of trading strategies utilized or
recommended that the firm/associated persons may not have publicly
disseminated. The proposal also provides claimants with documentation
of any management supervision over the accounts.
Proposed List 1, Item 4--In the current Guide, for claims alleging
unauthorized trading, firms/associated persons are required to produce
the documents they relied on to establish that claimants authorized the
transactions at issue (See current List 11, Item 3). For claims
alleging unauthorized trading, the proposed Guide would also require
firms/associated persons to produce all documents relating to the
claimants' authorization of transactions. This addition acknowledges
that there may be documents in addition to those relied on by the firm
that are relevant or could lead to relevant evidence.
Proposed List 1, Item 5--The current Guide requires firms/
associated persons to produce, for specified claim types, all materials
prepared or used by the firm/associated persons relating to the
transactions or products at issue, including research reports,
prospectuses, and other offering documents such as documents intended
or identified as being ``for internal use only,'' and worksheets or
notes indicating the associated persons reviewed or read such
documents. As an alternative, the firm/associated persons may produce a
list of such documents that contains sufficient detail for the
claimants to identify each document listed. Upon request by a party,
the firm/associated persons are required to provide any documents
identified on that alternative list (see current List 7 titled
Misrepresentation/Omissions, List 9 titled Negligence/Breach of
Fiduciary Duty, and List 13, Item 1 relating to claims alleging
unsuitability).
FINRA is proposing to add clarity to this item by specifying that,
in addition to materials prepared or used by the firm/associated
persons, the firm/associated persons must produce the materials
provided to the claimants. The amendments would also require production
of sales materials and performance or risk data. FINRA is proposing to
delete the alternative two-step production procedure to reduce delays
in the discovery process.
Proposed List 1, Item 6--The current Guide requires firms/
associated persons to produce all notes, including entries in any diary
or calendar, relating to the claimants' accounts at issue (see current
List 1, Item 6). FINRA is proposing to expand the scope of the item by
requiring production of notes relating to the claimants in addition to
the claimants' accounts or transactions at issue. For example, notes
about the claimants' other accounts may provide evidence in the case.
Proposed List 1, Item 7--The current Guide requires firms/
associated persons to produce records relating to the claimants'
accounts at issue, such as internal reviews and exception and activity
reports, which reference the claimants' accounts at issue (see current
List 1, Item 11). FINRA is proposing to clarify the item by specifying
that firms/associated persons would be required to produce notes or
memoranda evidencing supervisory, compliance, or managerial review of
the claimants' accounts or trades for the period at issue. The item
would also require production of correspondence between the claimants
and the firm/associated persons relating to the claimants' accounts or
transactions that bear indications of managerial, compliance, or
supervisory review of such correspondence. The Guide would address
exception reports and supervisory reviews, among other documents, in
proposed Item 13.
Proposed List 1, Item 8--The current Guide requires firms/
associated persons to produce recordings and notes of telephone calls
or conversations about the claimants' accounts at issue that occurred
between the associated persons and the claimants (see current List 1,
Item 7). FINRA proposes to expand this item to include telephone logs.
Currently, telephone logs are only required in cases alleging
unauthorized trading (see current List 11, Item 2). However, FINRA
would narrow the item from records relating to the claimant's
``accounts at issue'' to records relating to the ``transactions at
issue.'' Producing recordings of telephone calls is labor intensive,
expensive, and difficult for firms unless the claimants are able to
specify a telephone call's date and time, provide the name of a person
the claimants spoke to at the firm, and/or specify the trade placed
during the conversation.
Proposed List 1, Item 9--FINRA is proposing to require firms/
associated persons to produce writings reflecting communications
between the associated persons assigned to the claimants' accounts at
issue during the time period at issue and members of the firm's
compliance department relating to the securities/products at issue and/
or the claimants' accounts. FINRA believes that such writings may
provide evidence relating to, among other matters, supervision of the
associated persons handling the claimants' accounts. This item would be
new in the Guide.
Proposed List 1, Item 10--The current Guide requires firms/
associated persons to produce Forms RE-3, U-4, and U-5, including all
amendments, customer complaints identified in the forms, and customer
complaints of a similar nature against the associated persons handling
the accounts at issue (see current List 1, Item 8).
FINRA proposes to amend this item to require that firms/associated
persons produce Forms RE-3, U-4, and U-5, and the Disclosure Reporting
Pages for the associated persons assigned to the claimants' accounts at
issue during the time period at issue. Disclosure Reporting Pages,
which are actually part of Forms U-4 and U-5, provide claimants with
valuable, detailed information about prior customer
[[Page 45688]]
complaints. FINRA would narrow production of these forms to the
associated persons assigned to the claimants' accounts at issue during
the time period at issue, to ease the burden of production for the
firms. Because of the sensitive nature of the personal information,
FINRA would permit the firm to redact the associated persons' Social
Security numbers.
Commenters on the 2008 proposal requested that FINRA require firms/
associated persons to produce all customer complaints against the
associated persons. To respond to these comments, FINRA proposes to
require firms/associated persons to produce all customer complaints
filed against the associated persons assigned to the accounts at issue
that were generated between three years prior to the first transactions
at issue through filing of the Statement of Claim, redacted to prevent
disclosure of nonpublic personal information about complaining
customers.
Proposed List 1, Item 11--The current Guide requires firms/
associated persons to produce all sections of the firm's Compliance
Manuals related to the claims alleged in the Statement of Claim,
including any separate or supplemental manuals governing the duties and
responsibilities of the associated persons and supervisors, any
bulletins (or similar notices) issued by the compliance department, and
the table of contents and index to each Manual (see current List 1,
Item 9).
FINRA is proposing to amend this Item to replace compliance manuals
with ``manuals and all updates thereto'' and compliance department with
``firm.'' The proposal would clarify that the firm/associated persons
must produce the manuals regardless of whether the firm characterizes
them as ``compliance manuals,'' and firms/associated persons must
produce bulletins from any department issuing them. FINRA is also
proposing to clarify that production of manuals, bulletins, and updates
is required for all years in which the Statement of Claim alleges that
the conduct occurred. Updates are material to establishing the firm
procedures in place during a specified time frame.
FINRA would also amend the item to require firms/associated persons
to provide a list of all of manuals and bulletins which may contain
directives related to the conduct or product at issue in the claim. The
list would enable claimants to identify any additional manual or
bulletin sections that may be relevant to their claims.
Proposed List 1, Item 12--The current Guide requires firms/
associated persons to produce all analyses and reconciliations of the
claimants' accounts during the time period and/or relating to the
transactions at issue (see current List 1, Item 10). FINRA is proposing
to amend this item to clarify that production is limited to analyses
and reconciliations ``prepared'' during the time period at issue, and
includes analyses and reconciliations prepared as part of a review of
the claimants' accounts or transactions at issue. These documents are
valuable because they may contain firm findings concerning reviews of
claimants' accounts.
Proposed List 1, Item 13--For claims alleging failure to supervise,
the current Guide requires the production of all exception reports and
supervisory activity reviews relating to the associated persons and/or
the claimants' accounts generated not earlier than one year before or
not later than one year after the transactions at issue, and all other
documents reflecting supervision of the associated persons and the
claimants' accounts (see current List 5, Item 2).
FINRA is proposing to require firms/associated persons to produce
all exception reports, supervisory activity reviews, concentration
reports, active account runs, and similar documents produced to review
for activity in the claimants' accounts related to the allegations in
the Statement of Claim or in which the transactions at issue are
referenced or listed.
For claims alleging failure to supervise, FINRA is proposing to
expand production beyond the review of activity in the claimants'
accounts also to cover other customer accounts handled by associated
persons at the firm. In such cases, FINRA is proposing to require
firms/associated persons to produce all exception reports, supervisory
activity reviews, concentration reports, active account runs, and
similar documents produced to review for activity in customer accounts
handled by associated persons and related to the allegations in the
Statement of Claim that were generated not earlier than one year before
or not later than one year after the transactions at issue.
FINRA would limit production to documents related to the
allegations made in the Statement of Claim to ease the burden of
production for firms/associated persons. FINRA believes that narrowing
the item would not negatively impact claimants because firms/associated
persons would continue to produce reports related to the claimants'
claims.
Proposed List 1, Item 14--For claims alleging failure to supervise,
the current Guide requires production of the portions of internal audit
reports at the branch in which the claimants maintained accounts that
focused on the associated persons or the transactions at issue, and
were generated not earlier than one year before or not later than one
year after the transactions at issue and discussed alleged improper
behavior in the branch against other individuals similar to the
improper conduct alleged in the Statement of Claim (see current List 5,
Item 3). FINRA is not proposing any substantive changes to this Item.
Proposed List 1, Item 15--The current Guide requires the production
of records of disciplinary action taken against associated persons by
any regulator or employer for all sales practice violations or conduct
similar to the conduct alleged to be at issue (see current List 1, Item
12). FINRA is not proposing any substantive changes to this item.
Proposed List 1, Item 16--FINRA is proposing to require firms/
associated persons to produce all investigations, charges, or findings
by any regulator (state, federal or self-regulatory organization) and
the firm/associated persons' responses to such investigations, charges,
or findings for the associated persons' alleged improper behavior
similar to that alleged in the Statement of Claim. This new item in the
Guide would expand the scope of documents that relate to the associated
persons' disciplinary history.
Proposed List 1, Item 17--For claims alleging failure to supervise,
the current Guide requires production of the portions of examination
reports or similar reports following an examination or an inspection
conducted by a state or federal agency or a self-regulatory
organization that focused on the associated persons or the transactions
at issue or that discussed alleged improper behavior in the branch
against other individuals similar to the improper conduct alleged in
the Statement of Claim (see current List 5, Item 4). Commenters on the
2008 proposal requested that FINRA include a time limit for production
of these documents. In response to these comments, FINRA is proposing
to limit production to those reports issued for the period one year
before the transactions at issue through the filing of the Statement of
Claim. FINRA believes that restricting the time frame for production
would reduce the firms' burden of production and offset the expansion
of this production to all cases while ensuring that claimants have
access to the reports that relate to their claims.
[[Page 45689]]
Proposed List 1, Item 18--FINRA is proposing to require firms/
associated persons to produce documents the respondents obtained by
subpoena or by document requests directed to third parties. While this
item would be new in the Guide, it is not a new requirement because the
subpoena rule, Rule 12512(e), already requires production of subpoenaed
documents. FINRA is proposing to cross-reference that rule in the
Guide. FINRA would also add documents received by request directed to
third parties at any time during the case to ensure that all parties
have access to documents obtained without a subpoena from non-parties.
Proposed List 1, Items 19, 20, and 21--In the current Guide, firms/
associated persons are required to produce documents relating to
associated persons' commissions and/or compensation when claimants
allege churning (see current List 3, Items 1-3), failure to supervise
(see current List 5, Item 1), or unsuitability (see current List 13,
Item 2).
Proposed List 1, Item 19--FINRA is proposing to require firms/
associated persons to produce documents showing the associated persons'
gross and net compensation for the transactions at issue in the
Statement of Claim. This is new in the Guide. Documentation of
compensation on an order-by-order basis provides parties with a clear
understanding of how much firms paid associated persons for the trading
at issue. If the accounts at issue were the subject of fee arrangements
that are not based on remuneration per trade, firms/associated persons
would be required to produce a record of compensation earned for the
period when the transactions in the accounts took place.
Proposed List 1, Item 20--The current Guide requires firms/
associated persons to produce commission runs relating to the
claimants' accounts at issue or, in the alternative, a consolidated
commission report relating to the accounts (see current List 3, Item
1). It also requires firms/associated persons to produce documents
reflecting compensation of any kind, including commissions, from all
sources generated by the associated persons assigned to the claimants'
accounts for the two months preceding, through the two months
following, the transactions at issue, or up to 12 months, whichever is
longer. The firm may redact all information identifying customers who
are not parties to the action except for the last four digits of the
non-party customer account number for each transaction (see current
List 3, Item 2).
In addition, for claims related to solicited trading activity,
FINRA is proposing to require the firm/associated persons to produce a
record of all compensation, monetary and non-monetary, including, but
not limited to, monthly commission runs for the associated persons who
handled the claimants' accounts. That record should reflect the
securities traded, dates traded, whether the trades were solicited or
unsolicited, and the gross and net commission from each trade. Firms
would be required to produce this record for a period of time beginning
three months before and ending three months after the trades at issue
in the claimants' accounts. FINRA is proposing to impose this
additional production only in claims relating to solicited trading
activity because the records would be most relevant to such activity.
The required documents may provide claimants with evidence regarding
the extent to which the associated person recommended securities to
other customers.
The firm may redact names and other non-public personal information
concerning customers who are not parties to this claim, but would be
required to provide sufficient information to identify: (1) The non-
party customers' accounts, including the last four digits of the non-
party customers' account numbers; (2) the associated persons' own and
related accounts, including the last four digits of the associated
persons' account numbers; and (3) the type of account (IRA, 401(k),
etc.). Activity in the associated persons' account may be correlated to
the transactions in the customers' accounts.
Proposed List 1, Item 21--The current Guide requires firms/
associated persons to produce documents describing the basis upon which
the firm compensated the associated persons during the years in which
the transactions or occurrences in question occurred, including any
bonus or incentive program, and compensation and commission schedules
(see current List 3, Item 3 and current List 13, Item 2). FINRA would
add clarity to this item by requiring production of a record of all
agreements pertaining to the relationship between the associated person
and the firm, summarizing the associated person's compensation
arrangement or plan with the firm, including commission and concession
schedules, bonus or incentive plans, and schedules showing
compensation. If the firm based the associated persons' compensation on
factors other than remuneration per trade, the item would require
documentation of the method by which compensation was determined.
Proposed List 1, Item 22--For claims with allegations relating to
an insurance product that includes a death benefit, FINRA is proposing
to require firms/associated persons to produce all information
concerning the claimants' insurance holdings and the recommendations,
if any, to the claimants regarding insurance products. This new
requirement in the Guide could provide parties with evidence in cases
involving annuities.
Items Firms/Associated Persons Would No Longer Be Required To Produce
Holding Pages--In the current Guide, firms/associated persons are
required to produce holding pages for the claimants' accounts at issue
(see current List 1, Item 4). FINRA is proposing to delete this item
from the Guide because holding pages (hand written records of
transactions made and kept by associated persons) are, generally, no
longer in use. Firms provide transaction information to customers on
account statements and/or confirmations.
Order tickets--In the current Guide, firms/associated persons are
required to produce order tickets for the claimants' transactions in
cases alleging unauthorized trading (see current List 11, Item 1).
FINRA is proposing to delete this requirement from the Guide because
production of order tickets is burdensome and evidence relating to
whether the claimants authorized a particular transaction would be
produced under proposed List 1, Items 4, 6, and 8.
List 2--Documents the Customers Shall Produce in All Customer Cases
The documents identified in each numbered item are presumptively
discoverable in every case unless the item specifically limits
production to a specific type of claim.
As stated above, to distinguish between customers who are parties
to an arbitration and other customers of a brokerage firm, the
discussion below refers to customer parties as ``claimants''
throughout.
Proposed List 2, Item 1--In the current Guide, claimants are
required to produce all claimant and claimant-owned business (including
partnership or corporate) federal income tax returns, limited to pages
1 and 2 of Form 1040, Schedules B, D, and E, or the equivalent for any
other type of return, for the three years prior to the first
transaction at issue in the Statement of Claim through the date the
Statement of Claim was filed (see current List 2, Item 1). FINRA is
proposing to expand this item to require production of Form 1040
schedule A and the IRS worksheets
[[Page 45690]]
related to Schedules A, B, D, and E. The expanded production would
provide parties with a broader understanding of the claimants'
financial status and investment activity during the relevant period.
The amendments would provide that the income tax returns must be
identical to those that the claimants filed with the Internal Revenue
Service.
Because of the sensitive nature of the personal information, FINRA
would permit claimants to redact their Social Security numbers. FINRA
would also permit claimants to redact information relating to medical
and dental expenses and the names of charities on Schedule A unless the
information relates to the allegations in the Statement of Claim.
Proposed List 2, Item 2--The current Guide requires claimants to
produce financial statements or similar statements of the claimants'
assets, liabilities, and/or net worth for the period covering the three
years prior to the first transaction at issue in the Statement of Claim
through the date the claimants filed the Statement of Claim (see
current List 2, Item 2). FINRA is proposing to add clarity to this item
by specifying that financial statements include statements within a
loan application. The item would also provide that claimants are not
required to create financial statements in order to comply with the
item.
Proposed List 2, Item 3--The current Guide requires claimants to
produce copies of all documents received from the firm/associated
persons and from any entities in which the claimants invested through
the firm/associated persons, including monthly statements, opening
account forms, confirmations, prospectuses, annual and periodic
reports, and correspondence (see current List 2, Item 3). FINRA is
proposing to expand this item to include research reports. Research
reports may provide evidence concerning the basis for the claimants'
investment decisions.
FINRA is proposing to eliminate mandatory production of account
statements and confirmations if claimants stipulate to having received
them. The amendments would require claimants to produce any statements
or confirmations with hand written notations on them or which are not
identical to those sent by the firm. The amendments would decrease
claimants' discovery costs while preserving the requirement to produce
documents that may have probative value.
Proposed List 2, Item 4--The current Guide requires claimants to
produce account statements and confirmations for accounts maintained at
securities firms other than the respondent firm for the three years
prior to the first transaction at issue in the Statement of Claim
through the date the claimants filed the Statement of Claim (see
current List 2, Item 4). FINRA is proposing to amend this item to
permit claimants to provide written authorization allowing the firm/
associated persons to obtain account statements directly from the
securities firms instead of providing copies of the statements. If the
claimants elect to provide written authorization to the firm/associated
persons to obtain the account statements, the claimants would still be
required to provide all account statements in the claimants'
possession, custody, or control with hand written notations on them or
which are not identical to those sent by the firm. The proposal would
ensure that other parties to the matter have a complete understanding
of the claimants' investing history. FINRA proposes to eliminate
confirmations from the item to ease the burden for investors. If
necessary, firms would be able to request confirmations separately.
Proposed List 2, Item 5--The current Guide requires claimants to
produce agreements, forms, information, or documents relating to the
accounts at issue signed by or provided by the claimants to the firm/
associated persons (see current List 2, Item 5). FINRA is proposing to
expand the scope of this item by requiring production of documents
relating to accounts or transactions at the firm regardless of whether
claimants signed the documents.
Proposed List 2, Item 6--The current Guide requires claimants to
produce account analyses and reconciliations prepared by or for the
claimants relating to the accounts at issue (see current List 2, Item
6). FINRA is proposing to provide clarity to this item by changing
``the account(s) at issue'' to ``the accounts at the respondent firm or
transactions with the respondent firm during the time period at
issue.''
Proposed List 2, Item 7--The current Guide requires claimants to
produce notes, including entries in diaries or calendars, relating to
the accounts at issue (see current List 2, Item 7). FINRA is proposing
to amend this item to provide clarity by changing ``the account(s) at
issue'' to ``accounts at the respondent firm or transactions at issue
with the respondent firm.''
Proposed List 2, Item 8--The current Guide requires claimants to
produce recordings and notes of telephone calls or conversations about
the claimants' accounts at issue that occurred between the associated
persons and the claimants (and any person purporting to act on behalf
of the claimants) (see current List 2, Item 8). For claims alleging
unauthorized trading, claimants are also required to produce telephone
records, including telephone logs, evidencing telephonic contact
between the claimants and the firm/associated persons (see current List
12, Item 1). FINRA is proposing to combine these items into new Item 8.
FINRA is not proposing any substantive changes to the items.
Proposed List 2, Item 9--The current Guide requires claimants to
produce correspondence between the claimants (and any person acting on
behalf of the claimants) and the firm/associated persons relating to
the accounts at issue (see current List 2, Item 9). FINRA is proposing
to amend this item to broaden the scope of production by deleting the
reference to firm/associated persons. The claimants may have
corresponded with persons/entities unrelated to the firm concerning the
transactions at issue.
Proposed List 2, Item 10--The current Guide requires claimants to
produce previously prepared written statements by persons with
knowledge of the facts and circumstances related to the accounts at
issue, including those by accountants, tax advisors, financial
planners, other associated persons, and any other third party (see
current List 2, Item 10). FINRA is not proposing any substantive
changes to the current item.
Proposed List 2, Item 11--The current Guide requires claimants to
produce complaints/Statements of Claim and answers filed in all civil
actions involving securities matters and securities arbitration
proceedings, and all final decisions and awards entered in these
matters (see current List 2, Item 12). FINRA is proposing to expand the
scope of this item by requiring claimants to produce non-confidential
settlements entered in these matters because the subject matter of non-
confidential settlements may be relevant to the pending case. The item
would specify that claimants must produce the documents for all claims
or complaints filed prior to the filing of the current Statement of
Claim.
FINRA is also proposing to add that, if a person is party to a
confidential settlement agreement that by its terms does not preclude
identification of the existence of the settlement agreement, the party
must identify the documents comprising the confidential settlement
agreement. The proposed change would state that, although not
presumptively discoverable, the panel could order the claimants to
produce a confidential settlement agreement. The proposal would ensure
that parties are aware of
[[Page 45691]]
other securities actions in which the claimants were parties.
Proposed List 2, Item 12--For claims alleging misrepresentation/
omissions (see current List 8, Item 1), negligence/breach of fiduciary
duty (see current List 10, item 1), or unsuitability (see current List
14, Item 1), the current Guide requires claimants to produce documents
showing the claimants' ownership in or control over any business
entity, including general and limited partnerships and closely held
corporations. FINRA is proposing to expand the scope of this item to
require that if the claimants are Trustees, they must also provide
documents showing all accounts over which they have trading authority.
The Trustees' trading activity for other accounts may provide evidence
of the Trustees' investment sophistication.
Proposed List 2, Item 13--For claims alleging unsuitability, the
current Guide requires claimants to produce written documents they
relied upon in making the investment decisions at issue (see current
List 14, Item 2). FINRA is proposing to delete the reference to
``documents relied upon'' and require production of all documents the
claimants ``received, including documents found through the claimants'
own efforts, relating to the investments at issue.'' Documents the
claimants received that relate to the investment at issue could provide
relevant evidence in a case even if the claimants did not rely on them
in making an investment decision.
Proposed List 2, Item 14--For claims alleging unauthorized trading,
the current Guide requires claimants to produce documents relied on to
show that transactions were made without the claimants' knowledge or
consent (see current List 12, Item 2). FINRA is not proposing any
substantive changes to the item and is proposing to limit the item to
claims alleging unauthorized trading.
Proposed List 2, Item 15--FINRA is proposing to require claimants
to produce all materials received or obtained from any source relating
to the transactions or products at issue, and other investment
opportunities, including research reports, sales literature,
performance or risk data, prospectuses, and other offering documents,
including documents intended or identified as being ``for internal use
only,'' and worksheets or notes. This item would be new in the Guide.
Production of these documents may provide evidence concerning the bases
for claimants' trading decisions. Therefore, FINRA also is proposing to
require claimants to produce any similar materials received or obtained
relating to other investment opportunities.
Proposed List 2, Item 16--For claims alleging misrepresentation/
omission (see current List 8, Item 2), negligence/breach of fiduciary
duty (see current List 10, Item 2), or unsuitability (see current List
14, Item 3), claimants are required to produce a copy of their resumes.
While FINRA is not proposing any substantive changes to the item,
claimants would be required to produce the documents in every case.
Proposed List 2, Item 17--For claims alleging misrepresentation/
omission (see current List 8, Item 3), negligence/breach of fiduciary
duty (see current List 10, Item 3), or unsuitability (see current List
14, Item 4), claimants are required to produce documents showing their
educational and employment background, or a description of their
background if not set forth in a resume. While FINRA is not proposing
any substantive changes to the item, claimants would be required to
produce the documents in every case.
Proposed List 2, Item 18--FINRA is proposing to require claimants
to produce documents the claimants obtained by subpoena or by document
requests directed to third parties. While this item would be new in the
Guide, it is not a new requirement because the subpoena rule, Rule
12512(e), already requires production of subpoenaed documents. FINRA is
proposing to cross-reference that rule in the Guide. FINRA would also
add documents received by request directed to third parties at any time
during the case, to ensure that all parties have access to documents
obtained without a subpoena from non-parties.
Proposed List 2, Item 19--For claims involving an insurance product
that provides a death benefit, FINRA is proposing to require claimants
to produce all insurance information received from an insurance sales
agent or securities broker relating to the insurance. This new
requirement in the Guide could provide parties with evidence that may
be relevant in cases involving annuities.
Items Customers Would No Longer Be Required To Produce
Claimants' complaints--The current Guide requires claimants to
produce all prior complaints by or on behalf of the claimants involving
securities matters and the firm's/associated persons' responses (see
current List 2, Item 11). FINRA is proposing to delete this item as
unnecessary because the respondent firm/associated persons would be in
possession of such complaints and any responsive documents.
Claimants' action to limit losses--The current Guide requires
claimants to produce all documents showing action taken by the
claimants to limit losses in the transactions at issue (see current
List 2, Item 13). FINRA is proposing to delete this item because, in
most instances, the firm/associated persons are in possession of any
documents that would be responsive to this item. If necessary, firms
would be able to request additional documents.
Conforming Changes
FINRA is proposing to amend Rules 12506 (Document Production Lists)
and 12508 (Objecting to Discovery; Waiver of Objection) to remove
references to Lists three through 14 since FINRA would delete these
lists in the proposed Guide.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\5\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that these revisions to the Guide will
reduce the number and limit the scope of disputes involving document
production and other matters, thereby improving the arbitration process
for the benefit of the public investors, broker-dealer firms, and
associated persons who use the process.
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\5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or
[[Page 45692]]
(ii) as to which the self-regulatory organization consents, the
Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2010-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2010-035. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2010-035
and should be submitted on or before August 24, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18999 Filed 8-2-10; 8:45 am]
BILLING CODE 8010-01-P
