Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to Amendments to the Discovery Guide Used in Customer Arbitration Proceedings, as Modified by Amendment No. 1, 57916-57921 [2013-22883]
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2013–92 and should be submitted on or
before October 11, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–22911 Filed 9–19–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70419; File No. SR–FINRA–
2013–024]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change Relating to
Amendments to the Discovery Guide
Used in Customer Arbitration
Proceedings, as Modified by
Amendment No. 1
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September 16, 2013.
I. Introduction
On April 1, 2011, the Securities and
Exchange Commission (‘‘Commission’’)
approved a proposal filed by the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) to update the
Discovery Guide (‘‘Guide’’) used in
customer arbitration proceedings.1
According to FINRA, the Guide
supplements the discovery rules
contained in the FINRA Code of
Arbitration Procedure for Customer
Disputes (‘‘Customer Code’’). It includes
an introduction describing the discovery
process generally, and explains how
arbitrators should apply the Guide in
arbitration proceedings. The
introduction is followed by two
Document Production Lists (one for
firms and associated persons, and one
for customers) that enumerate the
documents that parties should exchange
without arbitrator or staff intervention
(collectively, the ‘‘Lists’’). The Guide
only applies to customer arbitration
proceedings, and not to intra-industry
cases.
As part of the rulemaking process to
update the guide in April 2011, FINRA
agreed to establish the Discovery Task
Force (‘‘Task Force’’) under the auspices
of FINRA’s National Arbitration and
Mediation Committee. FINRA charged
the Task Force with reviewing
substantive issues relating to the Guide
on a periodic basis to keep the Guide
current as products change and new
discovery issues arise. FINRA stated
17 17
CFR 200.30–3(a)(12).
Exchange Act Rel. No. 64166 (Apr. 1, 2011),
76 FR 19155 (Apr. 6, 2011).
1 See
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that it would ask the Task Force to
review issues related to electronic
discovery (‘‘e-discovery’’) and product
cases.
On June 3, 2013, FINRA filed with the
Commission, pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 2 and Rule
19b–4 thereunder,3 a proposed rule
change to amend the Guide to provide
general guidance on electronic
discovery (‘‘e-discovery’’) issues and
product cases and to clarify the existing
provision relating to affirmations made
when a party does not produce
documents specified in the Guide.
FINRA believes that the proposed rule
change, as described below, fulfills its
commitment to review the topics of ediscovery and product cases with the
Task Force that FINRA established in
2011.4 The Task Force also reviewed
concerns raised by forum users about a
potential loophole created by the
wording of the Guide’s affirmation
section describing when and how a
party indicates that there are no
responsive documents in the party’s
possession, custody, or control.
The proposed rule change was
published for comment in the Federal
Register on June 20, 2013.5 The
Commission received eighteen comment
letters on the proposal.6 On September
2 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
4 See supra note 1.
5 See Exchange Act Rel. No. 69761 (June 13,
2013), 78 FR 37261 (June 20, 2013).
6 Comment letters were submitted by Mary Alice
McLarty, President, American Association for
Justice, dated July 11, 2013 (‘‘AAJ Letter’’); Katrina
M. Boice, Aidikoff, Uhl and Bakhtiari, dated July
10, 2013 (‘‘Boice Letter’’); Carl J. Carlson, Tousley
Brain Stephens, PLLC, dated July 11, 2013
(‘‘Carlson Letter’’); Steven B. Caruso, Esq., Maddox
Hargett & Caruso, P.C., dated June 20, 2013
(‘‘Caruso Letter’’); David T. Bellaire, Esq., Executive
Vice President and General Counsel, Financial
Services Institute, dated July 11, 2013 (‘‘FSI
Letter’’); Glenn S. Gitomer, McCausland Keen &
Buckman, dated July 11, 2013 (‘‘Gitomer Letter’’);
Dale Ledbetter, Ledbetter & Associates, P.A., dated
July 11, 2013 (‘‘Ledbetter Letter’’); Seth E. Lipner,
Professor of Law, Zicklin School of Business,
Baruch College, Member Deutsch Lipner, dated July
11, 2013 (‘‘Lipner Letter’’); Peter Mougey, Levin,
Papantonio, Thomas, Mitchell, Rafferty, & Proctor,
P.A., dated July 11, 2013 (‘‘Mougey Letter’’); Jill I.
Gross, Director, Crystal Green, Student Intern,
Susan Papacostas, Student Intern, Investor Rights
Clinic, Pace University School of Law, dated July
11, 2013 (‘‘Pace Letter’’); Scott C. Ilgenfritz,
President, Public Investors Arbitration Bar
Association, dated July 11, 2013 (‘‘PIABA Letter’’);
Scott Silver, Silver Law Group, dated July 11, 2013
(‘‘Silver Letter’’); Brian N. Smiley, Smiley Bishop
Porter, LLP, dated July 11, 2013 (‘‘Smiley Letter’’);
John R. Snyder and Matthew C. Applebaum,
Bingham McCutchen LLP, dated July 8, 2013
(‘‘Snyder and Applebaum Letter’’); Debra G. Speyer,
Esq., Law Offices of Debra G. Speyer, dated July 10,
2013 (‘‘Speyer Letter’’); Victoria Mikhelashvili,
Legal Intern, Nathaniel R. Torres, Legal Intern, and
Christine Lazaro, Esq., Director, Securities
3 17
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4, 2013, FINRA responded to the
comments and filed Amendment No. 1
to the proposed rule change.7 This order
approves the proposed rule change, as
modified by Amendment No. 1. The text
of the proposed rule change, as
modified by Amendment No. 1, is
available on FINRA’s Web site at https://
www.finra.org, at the principal office of
FINRA, on the Commission’s Web site at
https://www.sec.gov, and at the
Commission’s Public Reference Room.
II. Description of the Proposal
A. E-Discovery
1. Form of Production
FINRA is proposing to amend the
Guide’s introduction to state that parties
are encouraged to discuss the form in
which they intend to produce
documents and, whenever possible, to
agree to the form of production. The
provision would require parties to
produce electronic files in a ‘‘reasonably
usable format.’’ The term ‘‘reasonably
usable format’’ would refer, generally, to
the format in which a party ordinarily
maintains a document, or to a converted
format that does not make it more
difficult or burdensome for the
requesting party to use during a
proceeding.
The proposed guidance would also
state that when arbitrators are resolving
contested motions about the form of
document production, they should
consider the totality of the
circumstances, including:
(1) For documents in a party’s
possession or custody, whether the
chosen form of production is different
from the form in which a document is
ordinarily maintained;
(2) For documents that must be
obtained from a third-party (because
they are not in a party’s possession or
custody), whether the chosen form of
production is different from the form in
which the third-party provided it; and
(3) For documents converted from
their original format, a party’s reasons
for choosing a particular form of
production; how the documents may
have been affected by the conversion to
a new format; and whether the
requesting party’s ability to use the
documents is diminished by any change
in the documents’ appearance,
Arbitration Clinic, St. Vincent DePaul Legal
Program, Inc., St. John’s University School of Law,
dated July 11, 2013 (‘‘St. John’s Letter’’); Leonard
Steiner, Attorney, dated July 10, 2013 (‘‘Steiner
Letter’’); and Matthew W. Woodrufff, Esq., Attorney
at Law, dated July 10, 2013 (‘‘Woodruff Letter’’).
7 Letter from Margo A. Hassan, Assistant Chief
Counsel, FINRA Dispute Resolution, to Elizabeth M.
Murphy, Secretary, Commission, dated September
4, 2013.
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searchability, metadata, or
maneuverability.
Regarding the third factor, FINRA
states that it intends to provide
arbitrators with guidance on the terms
‘‘appearance,’’ ‘‘searchability,’’
‘‘metadata,’’ and ‘‘maneuverability’’ in
training materials to be posted on its
Web site.
2. Cost or Burden of Production
In conjunction with the proposed
guidance on e-discovery, FINRA also
proposes to amend the Guide’s
discussion on cost or burden of
production. Currently, the Guide states
that 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 cost or burden impact, such
as narrowing the time frame or scope of
an item on the Lists, or determining
whether another document can provide
the same information. FINRA proposes
to amend this provision to advise
arbitrators that they may order a
different form of production if it would
lessen the cost or burden impact of
producing electronic documents.
FINRA believes that requiring
document production in a reasonably
usable format and providing general
guidance on e-discovery and the costs
and benefits of document production
would provide arbitrators with the
awareness and flexibility to tailor
document production to the needs of
each case and help parties to resolve an
e-discovery dispute in a cost effective
manner.
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B. Product Cases
FINRA is proposing to amend the
Guide’s introduction to add guidance on
product cases. The Guide would state
that a ‘‘product case’’ is one in which
one or more of the asserted claims
centers around allegations regarding the
widespread mismarketing or defective
development of a specific security or
specific group of securities. The Guide
would enumerate some of the ways that
product cases differ from other customer
cases. In particular, in product cases: (1)
The volume of documents tends to be
much greater; (2) multiple investor
claimants may seek the same
documents; (3) the documents are not
client specific; (4) the product at issue
is more likely to be the subject of a
regulatory investigation; (5) the cases
are more likely to involve a class action
with documents subject to a mandatory
hold;8 (6) the same documents may have
8 A mandatory hold is an act by an entity to
preserve documents and electronic information
relevant to a lawsuit or government investigation.
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been produced to multiple parties in
other cases involving the same security
or to regulators; and (7) documents are
more likely to relate to due diligence
analyses performed by persons who did
not handle the claimant’s account.
The Guide would explain that the
Lists may not provide all of the
documents parties typically request in a
product case relating to, among other
things, a firm’s creation of a product,
due diligence reviews of a product,
training on or marketing of a product, or
post-approval review of a product. The
Guide would emphasize that, in a
product case, parties are not limited to
the documents enumerated in the Lists.
It would also stress that the Customer
Code provides a mechanism for parties
to seek additional documents. Finally,
the Guide would explain that parties do
not always agree on whether a case is
a product case, and the arbitrators may
ask the parties to explain their rationale
for asserting that a case is, or is not, a
product case.
C. Affirmations
The Guide provides for affirmations
when a party indicates that there are no
responsive documents in the party’s
possession, custody, or control. The
‘‘affirmation language’’ provides that,
upon the request of a party seeking
documents, the customer, or appropriate
person at the firm who has knowledge,
must state that the party conducted a
good faith search for the documents,
describe the extent of the search, and
state that based on the search there are
no requested documents (the
‘‘Affirmation Language’’).
FINRA is proposing to amend the
Affirmation Language to make clear that
a party may request an affirmation when
an opposing party makes only a partial
production. The revised language would
provide that, if a party does not produce
a document specified in the Lists, upon
the request of the party seeking the
document that was not produced, the
customer or the appropriate person at
the brokerage firm who has knowledge
must affirm in writing that the party
conducted a good faith search for the
requested document. FINRA is also
proposing to require a party to state the
sources searched in the affirmation.
FINRA believes that the proposed
revisions would clarify the Affirmation
Language and reduce disputes over
requests for affirmations.
D. Clarifying Amendments
FINRA is proposing to add additional
sub-headings to the Guide’s
introduction to break the introduction
into distinct sections that address
specific concerns. The new headings
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would be: ‘‘Flexibility in Discovery;’’
‘‘Cost or Burden of Production;’’
‘‘Requests for Additional Documents;’’
‘‘Form of Production;’’ and ‘‘Product
Cases.’’
FINRA is also proposing to move the
sentence that reads: ‘‘[w]here additional
documents are relevant in a particular
case, parties can seek them in
accordance with the time frames
provided in the 12500 series of rules’’ to
the section that would be titled
‘‘Requests for Additional Documents.’’
FINRA is also proposing to add the
phrase ‘‘may be’’ before ‘‘relevant’’ to
reflect that relevancy is not always
established at the time that a party
requests additional documents. Finally,
FINRA is proposing to amend the
sentence in that paragraph that states
that ‘‘[a]rbitrators must use their
judgment in considering requests for
additional documents and may not deny
document requests on the grounds that
the documents are not expressly listed
in the Discovery Guide’’ to add the term
‘‘solely’’ before the phrase ‘‘on the
grounds.’’
FINRA believes that the proposed
clarifying amendments will add clarity
to the Guide.
III. Summary of Comment Letters and
FINRA’s Response
As noted above, the Commission
received eighteen comment letters on
the proposed amendments to the
Guide.9 While the comment letters
expressed general support for the
proposed amendments, each comment
letter raised concerns with particular
aspects of the proposed amendments.
The comment letters and FINRA’s
response 10 are summarized below.
A. E-Discovery
1. Form of Production
One commenter suggested that
production of a document in one format
(electronically) should not preclude its
production in other formats.11 This
commenter also stated that a party
should be permitted to seek production
of a document in the format in which it
was given to the customer and also in
a summary format. In addition, this
commenter urged FINRA to require a
firm, at the request of the customer, to
produce a document in any or all of the
formats that the firm makes available to
customers online.
FINRA responded that cooperation
between parties is a ‘‘hallmark of
9 See
supra note 6.
supra note 7.
11 See Woodruff Letter.
10 See
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discovery in the FINRA forum.’’12
Accordingly, FINRA stated that its
proposal amends the Guide to highlight
its expectation that the parties will
discuss their discovery needs and,
whenever possible, agree to the format.
To facilitate agreement, FINRA noted
that the proposal also requires parties to
produce electronic files in a ‘‘reasonably
usable format.’’ FINRA believes that
requiring cooperation in discovery, and
requiring parties to produce documents
in a reasonably usable format, are
sufficient to ensure that parties are able
to get the documents they need in a
suitable format. Therefore, FINRA
believes the commenter’s suggested
revisions are unnecessary.
One commenter recommended that
FINRA add ‘‘the size of the proceeding’’
and ‘‘the relative resources of the
parties’’ to the list of factors that
arbitrators consider when they are
determining whether electronic files
have been produced in a reasonably
usable format.13 Similarly, another
commenter suggested that FINRA advise
its arbitrators to consider the potential
costs to customers of producing
documents in certain formats.14 A
different commenter urged FINRA to
amend the Guide to state that parties are
expected to discuss key words and
phrases to be used to search for
documents prior to production.15
FINRA acknowledged the concerns of
these three commenters but believes
they are best addressed through
arbitrator training. Accordingly, FINRA
stated that it will identify these
concerns in its arbitrator training
materials, which are published on
FINRA’s Web site.
One commenter suggested that FINRA
revise its proposed definition of
‘‘reasonably useable format’’ by
replacing the phrase ‘‘during a
proceeding’’ with ‘‘in connection with
the arbitration’’ to clarify that the
requirement applies to all pre-hearing
phrases of the arbitration and is not
limited to the arbitration hearing
itself.16 FINRA responded that it
intended the requirement to apply all
phases of the proceeding and amended
the proposal as suggested.
One commenter recommended that
FINRA revise one of the factors
12 See FINRA Rule 12505 of the Customer Code
(Cooperation of Parties in Discovery) (requiring
parties to cooperate to the fullest extent practicable
in the exchange of documents to expedite the
arbitration).
13 See Woodruff Letter.
14 See Pace Letter (stating that ‘‘customers of
limited means may have difficulty producing
documents in any format other than hard copy’’).
15 See St. John’s Letter.
16 See Woodruff Letter.
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arbitrators consider when determining
whether documents are being produced
in a reasonably useable format by
replacing the word ‘‘maneuverability’’
with ‘‘versatility.’’ 17 FINRA believes
that the term ‘‘maneuverability’’ was
correctly defined and was the
appropriate term in the context of the
proposed amendments. FINRA therefore
declined to amend the Guide as the
commenter proposed.
One commenter suggested that
allowing arbitrators to determine the
relevance of documents and consider
alternatives to e-discovery, as proposed,
would make it more difficult for
plaintiffs to discover relevant
information.18 As an alternative, that
commenter recommended that FINRA
rely on the subparts of Rule 26 of the
Federal Rules of Civil Procedure relating
to e-discovery as a guidepost.19
FINRA responded that it believes that
arbitrators are in the best position to
manage the discovery process and to
determine the relevance of requested
documents. FINRA also stated that the
Guide currently provides arbitrators the
flexibility to tailor the discovery process
to the facts and circumstances of each
case, including the needs of the parties.
FINRA believes that the proposed rule
change furthers flexibility in the
discovery process by (1) directing
arbitrators to consider the totality of the
facts and circumstances when resolving
motions related to the form of
production and (2) requiring parties to
produce electronic documents in a
reasonably usable format. In sum,
FINRA believes the proposal would
improve the efficiency and cost
effectiveness of the arbitration process.
FINRA also believes that the proposed
guidance is consistent with the
principles of the Federal Rules of Civil
Procedure governing discovery cited by
17 See Woodruff Letter (recommending revising
the factor to read ‘‘whether the requesting party’s
ability to use the documents is diminished by a
change in the documents’ appearance, searchability,
metadata, or versatility’’).
18 See AAJ Letter.
19 See Fed. R. Civ. P. 26(f) (Conference of the
Parties; Planning for Discovery) (in relevant part,
generally requiring the parties to meet and confer
to develop a discovery plan); and Fed. R. Civ. P.
26(b)(2)(C) (requiring the court to limit the
frequency and extent of discovery based on certain
facts and circumstances, such as the discovery
sought is unreasonably cumulative or duplicative,
or can be obtained from some other source that is
more convenient, less burdensome, or less
expensive; the party seeking discovery has had
ample opportunity to obtain the information by
discovery in the action; or the burden or expense
of the proposed discovery outweighs its likely
benefit, considering the needs of the case, the
amount in controversy, the parties’ resources, the
importance of the issues at stake in the action and
the importance of the discovery in resolving the
issues).
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the commenter.20 Therefore, FINRA
declined to amend the proposed rule
change as suggested by the commenter.
One commenter requested that FINRA
include language in the Guide requiring
the producing party to state whether the
documents being produced are in the
format in which they are ordinarily
maintained, or in the case of documents
obtained from a third-party, the format
in which the third party provided them.
In this commenter’s view, if a party
produces documents in a format
different than the format in which they
are ordinarily maintained or were
obtained from a third-party, the party
should explain the differences between
them in detail sufficient for the
recipient to understand their
significance, including whether the
party omitted any information from the
original format.21
FINRA responded that it believes that
the proposal already addresses the
commenter’s concerns. Specifically,
FINRA stated that the proposal would
encourage parties to discuss and agree,
if possible, to the form in which they
intend to produce documents, and
instruct arbitrators who are resolving
disputes about the form of production to
consider (1) whether the form of
productions is different from the form in
which the document is ordinarily
maintained; (2) whether it is different
from the form that was received from a
third-party; and (3) the producing
party’s reasons for converting a
document to a particular form for
production and how the conversion may
have affected the documents. Therefore,
FINRA declined to amend the proposal
as requested by the commenter.
One commenter viewed the proposal
as vague and suggested that FINRA state
that if parties are unable to reach an
agreement regarding the form of
production, the responding party should
produce an electronic document in the
form in which it is ordinarily
maintained or in a reasonably usable
format.22 FINRA responded that the
proposal would require parties to
produce electronic documents in a
‘‘reasonably usable format’’ and that it
believes its definition of ‘‘reasonably
usable’’ is sufficiently clear. Therefore,
FINRA declined to amend the proposed
rule change as suggested by the
commenter.
2. Cost or Burden of Production
One commenter objected to the
proposal to advise arbitrators that they
may order a different form of production
20 Id.
21 See
22 See
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Mougey Letter.
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if it would lessen the cost or burden
impact of producing electronic
documents.23 Three commenters
requested that FINRA provide
specificity on how parties would
demonstrate that the cost or burden of
production is disproportionate to the
need for the document.24 One
commenter suggested that FINRA
require firms objecting to production
based on the cost or burden to submit
an affidavit specifying their objection.25
Similarly, another commenter
recommended requiring a party
objecting to production based on the
cost or burden to submit an affirmation
of the purported cost or burden.26 One
commenter urged FINRA to amend the
Guide to state that arbitrators should
‘‘highly scrutinize’’ a firm’s objections
to production based on the cost or
burden of e-discovery.27 In addition,
one commenter suggested that FINRA
educate its arbitrators about the
importance of making parties
substantiate any objections to
production based on cost and burden.28
FINRA responded that FINRA Rule
12508 requires a party objecting to
producing documents on the Lists or
pursuant to a request made under
FINRA Rule 12507 (Other Discovery
Requests) to explain, in writing, the
basis for the party’s objection.
Accordingly, a party objecting to
production based on cost or burden
must explain the basis for the party’s
objection to the arbitrators. The
arbitrators must then determine whether
the party’s demonstration is sufficient or
if an affidavit or affirmation is required.
Accordingly, FINRA believes the
Customer Code and the Guide are
sufficient to require parties to support
their objections and that its arbitrator
training materials are sufficient to make
arbitrators aware of their obligations to
require parties to substantiate objections
to production based on the cost and
burden. Therefore, FINRA declined to
amend the proposal as suggested by the
commenters.
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B. Product Cases
Several commenters supported
FINRA’s proposal to add general
guidance about the types of documents
that parties typically request in product
cases 29 and, in particular, FINRA’s
23 See
24 See
AAJ Letter.
Pace Letter, Speyer Letter, and St. John’s
Letter.
25 See PIABA Letter.
26 See Caruso Letter.
27 See Mougey Letter.
28 See Smiley Letter.
29 See Boice Letter, Caruso Letter, FSI Letter,
Gitomer Letter, Pace Letter, PIABA Letter, Silver
Letter, Smiley Letter, and Speyer Letter.
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acknowledgement that parties typically
request certain types of documents in
product cases that may not be on the
Lists.30 Several commenters, however,
suggested revisions.
Three commenters recommended that
FINRA adopt a Document Production
List specific to product cases.31 One of
the commenters asserted that without a
list of presumptively discoverable
documents, arbitrators could perceive
the requested documents as less
discoverable.32 Another commenter
opined that FINRA’s description of the
types of documents that parties
typically request in product cases in the
introduction to the Guide would create
a new category of discoverable
documents, which could confuse
arbitrators and customers.33
FINRA responded that it considered
adding an item to the firm/associated
person Document Production List that
would enumerate specific documents
that firms/associated persons would be
required to produce when a customer
alleged that a claim was a product case.
FINRA believes, however, that having a
list of presumptively discoverable
documents for parties to exchange
without arbitrator or staff oversight
might not be appropriate in the context
of product cases. FINRA believes that
such a list would have a significant
economic impact on firms because the
typical volume of documents associated
with product cases is high, even though
not every presumptively discoverable
document would have probative value
for every product case. Alternatively,
FINRA stated that adopting general
guidance would allow the parties and
arbitrators to tailor document discovery
to the facts and circumstances of each
specific product case. Therefore, FINRA
declined to amend the proposal as
suggested by the commenters.
Two commenters recommended that
FINRA advise arbitrators to consider the
cost or burden of production when
deciding whether to order the
production of product specific
documents at the request of a
customer.34 FINRA responded that the
introduction to the Guide provides
general guidance for arbitrators
considering objections based on the cost
or burden of production. FINRA stated
that it expects arbitrators to apply this
guidance, as appropriate, throughout the
discovery process in all types of cases,
30 See Boice Letter, Caruso Letter, Gitomer Letter,
PIABA Letter, and Speyer Letter.
31 See Mougey Letter, Pace Letter, and St. John’s
Letter.
32 See Pace Letter.
33 See St. John’s Letter.
34 See FSI Letter and Snyder and Applebaum
Letter.
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57919
including product cases. FINRA also
stated that upon approval of the
proposal it would publish in its
arbitrator training materials instructions
for arbitrators to consider the cost or
burden of production when deciding
whether to order the production of
product specific documents. For those
reasons, FINRA declined to amend the
proposal as suggested.
One commenter urged FINRA to
specify that it does not intend to
sanction broad discovery requests for
production made in other cases or in
response to a regulatory request (i.e.,
‘‘shortcut’’ discovery).35 FINRA
responded that the Customer Code and
the Guide require parties to cooperate in
discovery. Thus, if a party objects to a
request because it is overly broad and/
or lacks appropriate specificity, FINRA
expects the parties to discuss the issue.
If the parties fail to resolve their
discovery issue, FINRA believes that the
party objecting to production has the
responsibility for articulating the
objection. Accordingly, FINRA believes
that it is unnecessary to specifically
state that it does not sanction ‘‘shortcut’’
discovery. Therefore, FINRA declined to
amend the proposal as suggested by the
commenter.
In its proposal, FINRA listed several
ways that product cases differ from
other customer cases and described the
types of documents that parties
typically request in products cases. One
commenter suggested that FINRA state
that (1) the presence of the enumerated
differences may not justify a threshold
finding that a claim is a product case,
and (2) the list of documents that parties
typically request should not be the
‘‘touchstone for what is relevant’’ and/
or discoverable in a product case.36
FINRA responded that it designed the
proposed guidance to educate parties
and arbitrators about product cases, and
when the parties disagree about whether
a claim centers around a product, to
provide a mechanism for arbitrators to
make a threshold determination that a
claim is, or is not, a product case.
Furthermore, it describes the types of
documents that parties typically request
in product cases as a signal to the
arbitrators that discovery in product
cases might reasonably go beyond the
documents enumerated in the Lists. For
these reasons, FINRA declined to amend
the proposal as suggested.
Another commenter suggested that
FINRA provide specific guidance to
arbitrators regarding the scope of
discovery in product cases to prevent
firms from limiting product discovery to
35 See
Snyder and Applebaum Letter.
36 Id.
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57920
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information given to the claimant or
communications regarding the claimant,
rather than to information or
communications relating to the
product.37 FINRA responded that the
proposal already addresses the
commenter’s concern because it
(1) explains how product cases differ
from other customer cases and (2)
instructs arbitrators that the standard for
discovery in the forum is whether a
document is relevant or likely to lead to
relevant evidence.38 Therefore, FINRA
declined to amend the proposed rule
change as suggested by the commenter.
mstockstill on DSK4VPTVN1PROD with NOTICES
C. Affirmations
Four commenters opined that the
Affirmation Language in the Guide
should not distinguish between
documents on the Lists and additional
documents requested.39 Accordingly,
they urged FINRA to replace the
provision allowing arbitrators to order
an affirmation regarding additional
documents not on the Lists with a
requirement for parties to submit an
affirmation at the request of a party
seeking additional documents not on
the Lists. One commenter supported
maintaining the distinction between
documents on the Lists and additional
documents.40 This commenter noted
that the documents enumerated on the
Lists were subject to Commission
review and a public comment period,
while any additional documents
requested would not have been subject
to the same process.
FINRA responded that it believes that
the commenters’ concerns require
additional analysis and consideration.
FINRA also stated that the proposed
rule change is an important step toward
improving the Guide language on
affirmations and should be approved by
the Commission at this time. Therefore,
while FINRA declined to amend the
proposal as suggested by the
commenters, it stated that it will discuss
their comments with the Task Force and
monitor the impact of amending the
Affirmation Language as proposed.
FINRA stated that its staff would then
consider whether to seek FINRA Board
approval of future amendments to the
Affirmation Language.
One commenter suggested that FINRA
clarify that it did not intend to require
affirmations in virtually all cases.41
37 See
Mougey Letter.
the Arbitrator’s Guide (at page 34) and the
‘‘Discovery Abuses & Sanctions’’ Training. Both
documents are available on FINRA’s Web site at
https://www.finra.org.
39 See Caruso Letter, Pace Letter, Speyer Letter,
and St. John’s Letter.
40 See Snyder and Applebaum Letter.
41 Id.
38 See
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17:24 Sep 19, 2013
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FINRA responded that it believes that
the obligations and guidance regarding
cooperation in discovery as detailed in
the Customer Code and Guide are
sufficient to ensure that parties do not
routinely require affirmations.
Therefore, FINRA declined to amend
the proposal as suggested by the
commenter.
Another commenter recommended
that FINRA amend the Guide to require
a producing party to identify the words
used in an electronic search for
documents so that the requesting party
could determine if the search was
appropriately comprehensive.42 FINRA
responded by reiterating its belief that
pursuant to the Customer Code and
Guide parties should discuss their
search terms. Furthermore, FINRA
believes that the topic should be
addressed in arbitrator training, rather
than in the Guide. Therefore, while
FINRA declined to amend the
Affirmation Language, it stated that it
will include a discussion on search
terms in the arbitrator training materials
on e-discovery if the Commission
approves the proposal.
D. Training Materials
One commenter suggested that FINRA
published text related to the proposal in
its arbitrator training material prior to
Commission approval of the proposed
rule change.43 FINRA responded that it
drafted the training materials at issue
independent of the proposed rule
change. FINRA also stated that it
published the training materials at the
recommendation of the Task Force to
prepare arbitrators to address the issues
unique to product cases that could come
before them. In addition, FINRA stated
that it drafted arbitrator training
materials consistent with the proposed
guidance on product cases and will
publish them if the Commission
approves the proposal.
E. Monitoring Implementation
One commenter recommended that
the Task Force monitor the
implementation of the proposed
guidance, including by polling
arbitrators and claimants’ counsel, and
suggested possible follow-up action if
FINRA’s general guidance proves
insufficient.44 Similarly, another
commenter encouraged FINRA and the
Commission to monitor the extent to
which the proposed amendments satisfy
parties’ discovery needs.45 FINRA
responded that it will monitor
42 See
St. John’s Letter.
Snyder and Applebaum Letter.
44 See PIABA Letter.
45 See Smiley Letter.
43 See
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
implementation of the proposed rule
change and work with the Task Force to
design a survey for parties and
arbitrators that would gauge the success
of the new guidance. FINRA stated that,
depending on its findings, it would then
consider next steps.
IV. Discussion and Commission
Findings
After carefully considering the
proposal, the comments submitted, and
FINRA’s response to the comments, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the
requirements of the Exchange Act and
rules and regulations thereunder
applicable to a national securities
association.46 In particular, the
Commission finds that the proposed
rule change is consistent with Exchange
Act Section 15A(b)(6),47 which requires,
among other things, that the rules of a
national securities association be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission believes that the
proposed amendments to the Guide
would improve the arbitration process
for the benefit of public investors,
broker-dealer firms, and associated
persons who use the FINRA Forum.
Specifically, the Commission believes
that the proposed amendments would,
among other things, help reduce the
number and limit the scope of disputes
involving document production and
other matters, particularly with regard
to e-discovery and product cases.
The Commission has considered the
commenters’ views on the proposed rule
change and believes that FINRA
responded appropriately to the concerns
raised. The Commission believes that, as
FINRA noted in its response letter,
many of the comments have been
addressed by the proposed amendments
or will be addressed through arbitrator
training. The Commission notes that
FINRA stated that it consulted with the
Task Force in developing its responses
to commenters. Moreover, FINRA stated
that it has committed to consult with
the Task Force on its arbitrator training
46 In approving the proposed rule change, the
Commission has considered the impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
47 15 U.S.C. 78o–3(b)(6).
E:\FR\FM\20SEN1.SGM
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Federal Register / Vol. 78, No. 183 / Friday, September 20, 2013 / Notices
materials, and will continue to work
with the Task Force to monitor
implementation of the proposed
amendments. In addition, FINRA stated
that it will share the results of its survey
with the Task Force and consider any
recommendations that Task Force
makes for further improvements to the
Guide.
For the reasons stated above, the
Commission finds that the rule change
is consistent with the Act and the rules
and regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to
Exchange Act Section 19(b)(2) 48 that the
proposed rule change (SR–FINRA–
2013–024), as modified by Amendment
No. 1, be, and hereby is, approved.
filed any periodic reports since the
period ended March 31, 2011.
The Commission is of the opinion that
the public interest and the protection of
investors require a suspension of trading
in the securities of the above-listed
companies.
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
Act of 1934, that trading in the
securities of the above-listed companies
is suspended for the period from 9:30
a.m. EDT on September 18, 2013,
through 11:59 p.m. EDT on October 1,
2013.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
BILLING CODE 8011–01–P
[FR Doc. 2013–22883 Filed 9–19–13; 8:45 am]
[File No. 500–1]
BILLING CODE 8011–01–P
[File No. 500–1]
Patch International, Inc., QuadTech
International, Inc., Strategic
Resources, Ltd., and Virtual Medical
Centre, Inc.; Order of Suspension of
Trading
September 18, 2013.
mstockstill on DSK4VPTVN1PROD with NOTICES
September 18, 2013.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Patch
International, Inc. because it has not
filed any periodic reports since the
period ended May 31, 2008.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of QuadTech
International, Inc. because it has not
filed any periodic reports since the
period ended April 30, 2008.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Strategic
Resources, Ltd. because it has not filed
any periodic reports since the period
ended June 30, 2007.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Virtual
Medical Centre, Inc. because it has not
48 15
49 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
17:24 Sep 19, 2013
Jkt 229001
SECURITIES AND EXCHANGE
COMMISSION
A.G. Volney Center, Inc. (f/k/a Buddha
Steel, Inc.), China Green Material
Technologies, Inc., China Tractor
Holdings, Inc., and Franklin Towers
Enterprises, Inc.; Order of Suspension
of Trading
SECURITIES AND EXCHANGE
COMMISSION
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of A.G. Volney
Center, Inc. (f/k/a Buddha Steel, Inc.)
because it has not filed any periodic
reports since the period ended
September 30, 2010.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of China Green
Material Technologies, Inc. because it
has not filed any periodic reports since
the period ended September 30, 2011.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of China
Tractor Holdings, Inc. because it has not
filed any periodic reports since the
period ended September 30, 2010.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Franklin
Towers Enterprises, Inc. because it has
not filed any periodic reports since the
period ended September 30, 2010.
The Commission is of the opinion that
the public interest and the protection of
investors require a suspension of trading
in the securities of the above-listed
companies.
PO 00000
Frm 00085
Fmt 4703
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
Act of 1934, that trading in the
securities of the above-listed companies
is suspended for the period from 9:30
a.m. EDT on September 18, 2013,
through 11:59 p.m. EDT on October 1,
2013.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2013–23041 Filed 9–18–13; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[FR Doc. 2013–23043 Filed 9–18–13; 4:15 pm]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Kevin M. O’Neill,
Deputy Secretary.
57921
Sfmt 4703
[File No. 500–1]
Municipal Mortgage & Equity LLC,
Prolink Holdings Corp., RPM
Technologies, Inc., SARS Corp.,
Secured Digital Storage Corp., Siboney
Corp., SiriCOMM, Inc., and Standard
Management Corp.; Order of
Suspension of Trading
September 18, 2013.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Municipal
Mortgage & Equity LLC because it has
not filed any Forms 10–Q for the period
ended June 30, 2006 through the period
ended September 30, 2010, and it filed
materially deficient Forms 10–K for the
period ended December 31, 2006
through the period ended December 31,
2010.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Prolink
Holdings Corp. because it has not filed
any periodic reports since the period
ended September 30, 2008.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of RPM
Technologies, Inc. because it has not
filed any periodic reports since the
period ended September 30, 2008.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of SARS Corp.
because it has not filed any periodic
reports since the period ended June 30,
2008.
It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Secured
Digital Storage Corp. because it has not
filed any periodic reports since the
period ended September 30, 2008.
E:\FR\FM\20SEN1.SGM
20SEN1
]]>Agencies
[Federal Register Volume 78, Number 183 (Friday, September 20, 2013)]
[Notices]
[Pages 57916-57921]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22883]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70419; File No. SR-FINRA-2013-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change Relating to
Amendments to the Discovery Guide Used in Customer Arbitration
Proceedings, as Modified by Amendment No. 1
September 16, 2013.
I. Introduction
On April 1, 2011, the Securities and Exchange Commission
(``Commission'') approved a proposal filed by the Financial Industry
Regulatory Authority, Inc. (``FINRA'') to update the Discovery Guide
(``Guide'') used in customer arbitration proceedings.\1\ According to
FINRA, the Guide supplements the discovery rules contained in the FINRA
Code of Arbitration Procedure for Customer Disputes (``Customer
Code''). It includes an introduction describing the discovery process
generally, and explains how arbitrators should apply the Guide in
arbitration proceedings. The introduction is followed by two Document
Production Lists (one for firms and associated persons, and one for
customers) that enumerate the documents that parties should exchange
without arbitrator or staff intervention (collectively, the ``Lists'').
The Guide only applies to customer arbitration proceedings, and not to
intra-industry cases.
---------------------------------------------------------------------------
\1\ See Exchange Act Rel. No. 64166 (Apr. 1, 2011), 76 FR 19155
(Apr. 6, 2011).
---------------------------------------------------------------------------
As part of the rulemaking process to update the guide in April
2011, FINRA agreed to establish the Discovery Task Force (``Task
Force'') under the auspices of FINRA's National Arbitration and
Mediation Committee. FINRA charged the Task Force with reviewing
substantive issues relating to the Guide on a periodic basis to keep
the Guide current as products change and new discovery issues arise.
FINRA stated that it would ask the Task Force to review issues related
to electronic discovery (``e-discovery'') and product cases.
On June 3, 2013, FINRA filed with the Commission, pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to
amend the Guide to provide general guidance on electronic discovery
(``e-discovery'') issues and product cases and to clarify the existing
provision relating to affirmations made when a party does not produce
documents specified in the Guide. FINRA believes that the proposed rule
change, as described below, fulfills its commitment to review the
topics of e-discovery and product cases with the Task Force that FINRA
established in 2011.\4\ The Task Force also reviewed concerns raised by
forum users about a potential loophole created by the wording of the
Guide's affirmation section describing when and how a party indicates
that there are no responsive documents in the party's possession,
custody, or control.
---------------------------------------------------------------------------
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See supra note 1.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on June 20, 2013.\5\ The Commission received eighteen comment
letters on the proposal.\6\ On September 4, 2013, FINRA responded to
the comments and filed Amendment No. 1 to the proposed rule change.\7\
This order approves the proposed rule change, as modified by Amendment
No. 1. The text of the proposed rule change, as modified by Amendment
No. 1, is available on FINRA's Web site at https://www.finra.org, at the
principal office of FINRA, on the Commission's Web site at https://www.sec.gov, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\5\ See Exchange Act Rel. No. 69761 (June 13, 2013), 78 FR 37261
(June 20, 2013).
\6\ Comment letters were submitted by Mary Alice McLarty,
President, American Association for Justice, dated July 11, 2013
(``AAJ Letter''); Katrina M. Boice, Aidikoff, Uhl and Bakhtiari,
dated July 10, 2013 (``Boice Letter''); Carl J. Carlson, Tousley
Brain Stephens, PLLC, dated July 11, 2013 (``Carlson Letter'');
Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated June
20, 2013 (``Caruso Letter''); David T. Bellaire, Esq., Executive
Vice President and General Counsel, Financial Services Institute,
dated July 11, 2013 (``FSI Letter''); Glenn S. Gitomer, McCausland
Keen & Buckman, dated July 11, 2013 (``Gitomer Letter''); Dale
Ledbetter, Ledbetter & Associates, P.A., dated July 11, 2013
(``Ledbetter Letter''); Seth E. Lipner, Professor of Law, Zicklin
School of Business, Baruch College, Member Deutsch Lipner, dated
July 11, 2013 (``Lipner Letter''); Peter Mougey, Levin, Papantonio,
Thomas, Mitchell, Rafferty, & Proctor, P.A., dated July 11, 2013
(``Mougey Letter''); Jill I. Gross, Director, Crystal Green, Student
Intern, Susan Papacostas, Student Intern, Investor Rights Clinic,
Pace University School of Law, dated July 11, 2013 (``Pace
Letter''); Scott C. Ilgenfritz, President, Public Investors
Arbitration Bar Association, dated July 11, 2013 (``PIABA Letter'');
Scott Silver, Silver Law Group, dated July 11, 2013 (``Silver
Letter''); Brian N. Smiley, Smiley Bishop Porter, LLP, dated July
11, 2013 (``Smiley Letter''); John R. Snyder and Matthew C.
Applebaum, Bingham McCutchen LLP, dated July 8, 2013 (``Snyder and
Applebaum Letter''); Debra G. Speyer, Esq., Law Offices of Debra G.
Speyer, dated July 10, 2013 (``Speyer Letter''); Victoria
Mikhelashvili, Legal Intern, Nathaniel R. Torres, Legal Intern, and
Christine Lazaro, Esq., Director, Securities Arbitration Clinic, St.
Vincent DePaul Legal Program, Inc., St. John's University School of
Law, dated July 11, 2013 (``St. John's Letter''); Leonard Steiner,
Attorney, dated July 10, 2013 (``Steiner Letter''); and Matthew W.
Woodrufff, Esq., Attorney at Law, dated July 10, 2013 (``Woodruff
Letter'').
\7\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA
Dispute Resolution, to Elizabeth M. Murphy, Secretary, Commission,
dated September 4, 2013.
---------------------------------------------------------------------------
II. Description of the Proposal
A. E-Discovery
1. Form of Production
FINRA is proposing to amend the Guide's introduction to state that
parties are encouraged to discuss the form in which they intend to
produce documents and, whenever possible, to agree to the form of
production. The provision would require parties to produce electronic
files in a ``reasonably usable format.'' The term ``reasonably usable
format'' would refer, generally, to the format in which a party
ordinarily maintains a document, or to a converted format that does not
make it more difficult or burdensome for the requesting party to use
during a proceeding.
The proposed guidance would also state that when arbitrators are
resolving contested motions about the form of document production, they
should consider the totality of the circumstances, including:
(1) For documents in a party's possession or custody, whether the
chosen form of production is different from the form in which a
document is ordinarily maintained;
(2) For documents that must be obtained from a third-party (because
they are not in a party's possession or custody), whether the chosen
form of production is different from the form in which the third-party
provided it; and
(3) For documents converted from their original format, a party's
reasons for choosing a particular form of production; how the documents
may have been affected by the conversion to a new format; and whether
the requesting party's ability to use the documents is diminished by
any change in the documents' appearance,
[[Page 57917]]
searchability, metadata, or maneuverability.
Regarding the third factor, FINRA states that it intends to provide
arbitrators with guidance on the terms ``appearance,''
``searchability,'' ``metadata,'' and ``maneuverability'' in training
materials to be posted on its Web site.
2. Cost or Burden of Production
In conjunction with the proposed guidance on e-discovery, FINRA
also proposes to amend the Guide's discussion on cost or burden of
production. Currently, the Guide states that 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 cost or burden impact, such as narrowing the time frame or
scope of an item on the Lists, or determining whether another document
can provide the same information. FINRA proposes to amend this
provision to advise arbitrators that they may order a different form of
production if it would lessen the cost or burden impact of producing
electronic documents.
FINRA believes that requiring document production in a reasonably
usable format and providing general guidance on e-discovery and the
costs and benefits of document production would provide arbitrators
with the awareness and flexibility to tailor document production to the
needs of each case and help parties to resolve an e-discovery dispute
in a cost effective manner.
B. Product Cases
FINRA is proposing to amend the Guide's introduction to add
guidance on product cases. The Guide would state that a ``product
case'' is one in which one or more of the asserted claims centers
around allegations regarding the widespread mismarketing or defective
development of a specific security or specific group of securities. The
Guide would enumerate some of the ways that product cases differ from
other customer cases. In particular, in product cases: (1) The volume
of documents tends to be much greater; (2) multiple investor claimants
may seek the same documents; (3) the documents are not client specific;
(4) the product at issue is more likely to be the subject of a
regulatory investigation; (5) the cases are more likely to involve a
class action with documents subject to a mandatory hold;\8\ (6) the
same documents may have been produced to multiple parties in other
cases involving the same security or to regulators; and (7) documents
are more likely to relate to due diligence analyses performed by
persons who did not handle the claimant's account.
---------------------------------------------------------------------------
\8\ A mandatory hold is an act by an entity to preserve
documents and electronic information relevant to a lawsuit or
government investigation.
---------------------------------------------------------------------------
The Guide would explain that the Lists may not provide all of the
documents parties typically request in a product case relating to,
among other things, a firm's creation of a product, due diligence
reviews of a product, training on or marketing of a product, or post-
approval review of a product. The Guide would emphasize that, in a
product case, parties are not limited to the documents enumerated in
the Lists. It would also stress that the Customer Code provides a
mechanism for parties to seek additional documents. Finally, the Guide
would explain that parties do not always agree on whether a case is a
product case, and the arbitrators may ask the parties to explain their
rationale for asserting that a case is, or is not, a product case.
C. Affirmations
The Guide provides for affirmations when a party indicates that
there are no responsive documents in the party's possession, custody,
or control. The ``affirmation language'' provides that, upon the
request of a party seeking documents, the customer, or appropriate
person at the firm who has knowledge, must state that the party
conducted a good faith search for the documents, describe the extent of
the search, and state that based on the search there are no requested
documents (the ``Affirmation Language'').
FINRA is proposing to amend the Affirmation Language to make clear
that a party may request an affirmation when an opposing party makes
only a partial production. The revised language would provide that, if
a party does not produce a document specified in the Lists, upon the
request of the party seeking the document that was not produced, the
customer or the appropriate person at the brokerage firm who has
knowledge must affirm in writing that the party conducted a good faith
search for the requested document. FINRA is also proposing to require a
party to state the sources searched in the affirmation.
FINRA believes that the proposed revisions would clarify the
Affirmation Language and reduce disputes over requests for
affirmations.
D. Clarifying Amendments
FINRA is proposing to add additional sub-headings to the Guide's
introduction to break the introduction into distinct sections that
address specific concerns. The new headings would be: ``Flexibility in
Discovery;'' ``Cost or Burden of Production;'' ``Requests for
Additional Documents;'' ``Form of Production;'' and ``Product Cases.''
FINRA is also proposing to move the sentence that reads: ``[w]here
additional documents are relevant in a particular case, parties can
seek them in accordance with the time frames provided in the 12500
series of rules'' to the section that would be titled ``Requests for
Additional Documents.'' FINRA is also proposing to add the phrase ``may
be'' before ``relevant'' to reflect that relevancy is not always
established at the time that a party requests additional documents.
Finally, FINRA is proposing to amend the sentence in that paragraph
that states that ``[a]rbitrators must use their judgment in considering
requests for additional documents and may not deny document requests on
the grounds that the documents are not expressly listed in the
Discovery Guide'' to add the term ``solely'' before the phrase ``on the
grounds.''
FINRA believes that the proposed clarifying amendments will add
clarity to the Guide.
III. Summary of Comment Letters and FINRA's Response
As noted above, the Commission received eighteen comment letters on
the proposed amendments to the Guide.\9\ While the comment letters
expressed general support for the proposed amendments, each comment
letter raised concerns with particular aspects of the proposed
amendments. The comment letters and FINRA's response \10\ are
summarized below.
---------------------------------------------------------------------------
\9\ See supra note 6.
\10\ See supra note 7.
---------------------------------------------------------------------------
A. E-Discovery
1. Form of Production
One commenter suggested that production of a document in one format
(electronically) should not preclude its production in other
formats.\11\ This commenter also stated that a party should be
permitted to seek production of a document in the format in which it
was given to the customer and also in a summary format. In addition,
this commenter urged FINRA to require a firm, at the request of the
customer, to produce a document in any or all of the formats that the
firm makes available to customers online.
---------------------------------------------------------------------------
\11\ See Woodruff Letter.
---------------------------------------------------------------------------
FINRA responded that cooperation between parties is a ``hallmark of
[[Page 57918]]
discovery in the FINRA forum.''\12\ Accordingly, FINRA stated that its
proposal amends the Guide to highlight its expectation that the parties
will discuss their discovery needs and, whenever possible, agree to the
format. To facilitate agreement, FINRA noted that the proposal also
requires parties to produce electronic files in a ``reasonably usable
format.'' FINRA believes that requiring cooperation in discovery, and
requiring parties to produce documents in a reasonably usable format,
are sufficient to ensure that parties are able to get the documents
they need in a suitable format. Therefore, FINRA believes the
commenter's suggested revisions are unnecessary.
---------------------------------------------------------------------------
\12\ See FINRA Rule 12505 of the Customer Code (Cooperation of
Parties in Discovery) (requiring parties to cooperate to the fullest
extent practicable in the exchange of documents to expedite the
arbitration).
---------------------------------------------------------------------------
One commenter recommended that FINRA add ``the size of the
proceeding'' and ``the relative resources of the parties'' to the list
of factors that arbitrators consider when they are determining whether
electronic files have been produced in a reasonably usable format.\13\
Similarly, another commenter suggested that FINRA advise its
arbitrators to consider the potential costs to customers of producing
documents in certain formats.\14\ A different commenter urged FINRA to
amend the Guide to state that parties are expected to discuss key words
and phrases to be used to search for documents prior to production.\15\
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\13\ See Woodruff Letter.
\14\ See Pace Letter (stating that ``customers of limited means
may have difficulty producing documents in any format other than
hard copy'').
\15\ See St. John's Letter.
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FINRA acknowledged the concerns of these three commenters but
believes they are best addressed through arbitrator training.
Accordingly, FINRA stated that it will identify these concerns in its
arbitrator training materials, which are published on FINRA's Web site.
One commenter suggested that FINRA revise its proposed definition
of ``reasonably useable format'' by replacing the phrase ``during a
proceeding'' with ``in connection with the arbitration'' to clarify
that the requirement applies to all pre-hearing phrases of the
arbitration and is not limited to the arbitration hearing itself.\16\
FINRA responded that it intended the requirement to apply all phases of
the proceeding and amended the proposal as suggested.
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\16\ See Woodruff Letter.
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One commenter recommended that FINRA revise one of the factors
arbitrators consider when determining whether documents are being
produced in a reasonably useable format by replacing the word
``maneuverability'' with ``versatility.'' \17\ FINRA believes that the
term ``maneuverability'' was correctly defined and was the appropriate
term in the context of the proposed amendments. FINRA therefore
declined to amend the Guide as the commenter proposed.
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\17\ See Woodruff Letter (recommending revising the factor to
read ``whether the requesting party's ability to use the documents
is diminished by a change in the documents' appearance,
searchability, metadata, or versatility'').
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One commenter suggested that allowing arbitrators to determine the
relevance of documents and consider alternatives to e-discovery, as
proposed, would make it more difficult for plaintiffs to discover
relevant information.\18\ As an alternative, that commenter recommended
that FINRA rely on the subparts of Rule 26 of the Federal Rules of
Civil Procedure relating to e-discovery as a guidepost.\19\
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\18\ See AAJ Letter.
\19\ See Fed. R. Civ. P. 26(f) (Conference of the Parties;
Planning for Discovery) (in relevant part, generally requiring the
parties to meet and confer to develop a discovery plan); and Fed. R.
Civ. P. 26(b)(2)(C) (requiring the court to limit the frequency and
extent of discovery based on certain facts and circumstances, such
as the discovery sought is unreasonably cumulative or duplicative,
or can be obtained from some other source that is more convenient,
less burdensome, or less expensive; the party seeking discovery has
had ample opportunity to obtain the information by discovery in the
action; or the burden or expense of the proposed discovery outweighs
its likely benefit, considering the needs of the case, the amount in
controversy, the parties' resources, the importance of the issues at
stake in the action and the importance of the discovery in resolving
the issues).
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FINRA responded that it believes that arbitrators are in the best
position to manage the discovery process and to determine the relevance
of requested documents. FINRA also stated that the Guide currently
provides arbitrators the flexibility to tailor the discovery process to
the facts and circumstances of each case, including the needs of the
parties. FINRA believes that the proposed rule change furthers
flexibility in the discovery process by (1) directing arbitrators to
consider the totality of the facts and circumstances when resolving
motions related to the form of production and (2) requiring parties to
produce electronic documents in a reasonably usable format. In sum,
FINRA believes the proposal would improve the efficiency and cost
effectiveness of the arbitration process. FINRA also believes that the
proposed guidance is consistent with the principles of the Federal
Rules of Civil Procedure governing discovery cited by the
commenter.\20\ Therefore, FINRA declined to amend the proposed rule
change as suggested by the commenter.
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\20\ Id.
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One commenter requested that FINRA include language in the Guide
requiring the producing party to state whether the documents being
produced are in the format in which they are ordinarily maintained, or
in the case of documents obtained from a third-party, the format in
which the third party provided them. In this commenter's view, if a
party produces documents in a format different than the format in which
they are ordinarily maintained or were obtained from a third-party, the
party should explain the differences between them in detail sufficient
for the recipient to understand their significance, including whether
the party omitted any information from the original format.\21\
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\21\ See Carlson Letter.
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FINRA responded that it believes that the proposal already
addresses the commenter's concerns. Specifically, FINRA stated that the
proposal would encourage parties to discuss and agree, if possible, to
the form in which they intend to produce documents, and instruct
arbitrators who are resolving disputes about the form of production to
consider (1) whether the form of productions is different from the form
in which the document is ordinarily maintained; (2) whether it is
different from the form that was received from a third-party; and (3)
the producing party's reasons for converting a document to a particular
form for production and how the conversion may have affected the
documents. Therefore, FINRA declined to amend the proposal as requested
by the commenter.
One commenter viewed the proposal as vague and suggested that FINRA
state that if parties are unable to reach an agreement regarding the
form of production, the responding party should produce an electronic
document in the form in which it is ordinarily maintained or in a
reasonably usable format.\22\ FINRA responded that the proposal would
require parties to produce electronic documents in a ``reasonably
usable format'' and that it believes its definition of ``reasonably
usable'' is sufficiently clear. Therefore, FINRA declined to amend the
proposed rule change as suggested by the commenter.
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\22\ See Mougey Letter.
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2. Cost or Burden of Production
One commenter objected to the proposal to advise arbitrators that
they may order a different form of production
[[Page 57919]]
if it would lessen the cost or burden impact of producing electronic
documents.\23\ Three commenters requested that FINRA provide
specificity on how parties would demonstrate that the cost or burden of
production is disproportionate to the need for the document.\24\ One
commenter suggested that FINRA require firms objecting to production
based on the cost or burden to submit an affidavit specifying their
objection.\25\ Similarly, another commenter recommended requiring a
party objecting to production based on the cost or burden to submit an
affirmation of the purported cost or burden.\26\ One commenter urged
FINRA to amend the Guide to state that arbitrators should ``highly
scrutinize'' a firm's objections to production based on the cost or
burden of e-discovery.\27\ In addition, one commenter suggested that
FINRA educate its arbitrators about the importance of making parties
substantiate any objections to production based on cost and burden.\28\
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\23\ See AAJ Letter.
\24\ See Pace Letter, Speyer Letter, and St. John's Letter.
\25\ See PIABA Letter.
\26\ See Caruso Letter.
\27\ See Mougey Letter.
\28\ See Smiley Letter.
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FINRA responded that FINRA Rule 12508 requires a party objecting to
producing documents on the Lists or pursuant to a request made under
FINRA Rule 12507 (Other Discovery Requests) to explain, in writing, the
basis for the party's objection. Accordingly, a party objecting to
production based on cost or burden must explain the basis for the
party's objection to the arbitrators. The arbitrators must then
determine whether the party's demonstration is sufficient or if an
affidavit or affirmation is required. Accordingly, FINRA believes the
Customer Code and the Guide are sufficient to require parties to
support their objections and that its arbitrator training materials are
sufficient to make arbitrators aware of their obligations to require
parties to substantiate objections to production based on the cost and
burden. Therefore, FINRA declined to amend the proposal as suggested by
the commenters.
B. Product Cases
Several commenters supported FINRA's proposal to add general
guidance about the types of documents that parties typically request in
product cases \29\ and, in particular, FINRA's acknowledgement that
parties typically request certain types of documents in product cases
that may not be on the Lists.\30\ Several commenters, however,
suggested revisions.
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\29\ See Boice Letter, Caruso Letter, FSI Letter, Gitomer
Letter, Pace Letter, PIABA Letter, Silver Letter, Smiley Letter, and
Speyer Letter.
\30\ See Boice Letter, Caruso Letter, Gitomer Letter, PIABA
Letter, and Speyer Letter.
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Three commenters recommended that FINRA adopt a Document Production
List specific to product cases.\31\ One of the commenters asserted that
without a list of presumptively discoverable documents, arbitrators
could perceive the requested documents as less discoverable.\32\
Another commenter opined that FINRA's description of the types of
documents that parties typically request in product cases in the
introduction to the Guide would create a new category of discoverable
documents, which could confuse arbitrators and customers.\33\
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\31\ See Mougey Letter, Pace Letter, and St. John's Letter.
\32\ See Pace Letter.
\33\ See St. John's Letter.
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FINRA responded that it considered adding an item to the firm/
associated person Document Production List that would enumerate
specific documents that firms/associated persons would be required to
produce when a customer alleged that a claim was a product case. FINRA
believes, however, that having a list of presumptively discoverable
documents for parties to exchange without arbitrator or staff oversight
might not be appropriate in the context of product cases. FINRA
believes that such a list would have a significant economic impact on
firms because the typical volume of documents associated with product
cases is high, even though not every presumptively discoverable
document would have probative value for every product case.
Alternatively, FINRA stated that adopting general guidance would allow
the parties and arbitrators to tailor document discovery to the facts
and circumstances of each specific product case. Therefore, FINRA
declined to amend the proposal as suggested by the commenters.
Two commenters recommended that FINRA advise arbitrators to
consider the cost or burden of production when deciding whether to
order the production of product specific documents at the request of a
customer.\34\ FINRA responded that the introduction to the Guide
provides general guidance for arbitrators considering objections based
on the cost or burden of production. FINRA stated that it expects
arbitrators to apply this guidance, as appropriate, throughout the
discovery process in all types of cases, including product cases. FINRA
also stated that upon approval of the proposal it would publish in its
arbitrator training materials instructions for arbitrators to consider
the cost or burden of production when deciding whether to order the
production of product specific documents. For those reasons, FINRA
declined to amend the proposal as suggested.
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\34\ See FSI Letter and Snyder and Applebaum Letter.
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One commenter urged FINRA to specify that it does not intend to
sanction broad discovery requests for production made in other cases or
in response to a regulatory request (i.e., ``shortcut'' discovery).\35\
FINRA responded that the Customer Code and the Guide require parties to
cooperate in discovery. Thus, if a party objects to a request because
it is overly broad and/or lacks appropriate specificity, FINRA expects
the parties to discuss the issue. If the parties fail to resolve their
discovery issue, FINRA believes that the party objecting to production
has the responsibility for articulating the objection. Accordingly,
FINRA believes that it is unnecessary to specifically state that it
does not sanction ``shortcut'' discovery. Therefore, FINRA declined to
amend the proposal as suggested by the commenter.
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\35\ See Snyder and Applebaum Letter.
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In its proposal, FINRA listed several ways that product cases
differ from other customer cases and described the types of documents
that parties typically request in products cases. One commenter
suggested that FINRA state that (1) the presence of the enumerated
differences may not justify a threshold finding that a claim is a
product case, and (2) the list of documents that parties typically
request should not be the ``touchstone for what is relevant'' and/or
discoverable in a product case.\36\ FINRA responded that it designed
the proposed guidance to educate parties and arbitrators about product
cases, and when the parties disagree about whether a claim centers
around a product, to provide a mechanism for arbitrators to make a
threshold determination that a claim is, or is not, a product case.
Furthermore, it describes the types of documents that parties typically
request in product cases as a signal to the arbitrators that discovery
in product cases might reasonably go beyond the documents enumerated in
the Lists. For these reasons, FINRA declined to amend the proposal as
suggested.
---------------------------------------------------------------------------
\36\ Id.
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Another commenter suggested that FINRA provide specific guidance to
arbitrators regarding the scope of discovery in product cases to
prevent firms from limiting product discovery to
[[Page 57920]]
information given to the claimant or communications regarding the
claimant, rather than to information or communications relating to the
product.\37\ FINRA responded that the proposal already addresses the
commenter's concern because it (1) explains how product cases differ
from other customer cases and (2) instructs arbitrators that the
standard for discovery in the forum is whether a document is relevant
or likely to lead to relevant evidence.\38\ Therefore, FINRA declined
to amend the proposed rule change as suggested by the commenter.
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\37\ See Mougey Letter.
\38\ See the Arbitrator's Guide (at page 34) and the ``Discovery
Abuses & Sanctions'' Training. Both documents are available on
FINRA's Web site at https://www.finra.org.
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C. Affirmations
Four commenters opined that the Affirmation Language in the Guide
should not distinguish between documents on the Lists and additional
documents requested.\39\ Accordingly, they urged FINRA to replace the
provision allowing arbitrators to order an affirmation regarding
additional documents not on the Lists with a requirement for parties to
submit an affirmation at the request of a party seeking additional
documents not on the Lists. One commenter supported maintaining the
distinction between documents on the Lists and additional
documents.\40\ This commenter noted that the documents enumerated on
the Lists were subject to Commission review and a public comment
period, while any additional documents requested would not have been
subject to the same process.
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\39\ See Caruso Letter, Pace Letter, Speyer Letter, and St.
John's Letter.
\40\ See Snyder and Applebaum Letter.
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FINRA responded that it believes that the commenters' concerns
require additional analysis and consideration. FINRA also stated that
the proposed rule change is an important step toward improving the
Guide language on affirmations and should be approved by the Commission
at this time. Therefore, while FINRA declined to amend the proposal as
suggested by the commenters, it stated that it will discuss their
comments with the Task Force and monitor the impact of amending the
Affirmation Language as proposed. FINRA stated that its staff would
then consider whether to seek FINRA Board approval of future amendments
to the Affirmation Language.
One commenter suggested that FINRA clarify that it did not intend
to require affirmations in virtually all cases.\41\ FINRA responded
that it believes that the obligations and guidance regarding
cooperation in discovery as detailed in the Customer Code and Guide are
sufficient to ensure that parties do not routinely require
affirmations. Therefore, FINRA declined to amend the proposal as
suggested by the commenter.
---------------------------------------------------------------------------
\41\ Id.
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Another commenter recommended that FINRA amend the Guide to require
a producing party to identify the words used in an electronic search
for documents so that the requesting party could determine if the
search was appropriately comprehensive.\42\ FINRA responded by
reiterating its belief that pursuant to the Customer Code and Guide
parties should discuss their search terms. Furthermore, FINRA believes
that the topic should be addressed in arbitrator training, rather than
in the Guide. Therefore, while FINRA declined to amend the Affirmation
Language, it stated that it will include a discussion on search terms
in the arbitrator training materials on e-discovery if the Commission
approves the proposal.
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\42\ See St. John's Letter.
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D. Training Materials
One commenter suggested that FINRA published text related to the
proposal in its arbitrator training material prior to Commission
approval of the proposed rule change.\43\ FINRA responded that it
drafted the training materials at issue independent of the proposed
rule change. FINRA also stated that it published the training materials
at the recommendation of the Task Force to prepare arbitrators to
address the issues unique to product cases that could come before them.
In addition, FINRA stated that it drafted arbitrator training materials
consistent with the proposed guidance on product cases and will publish
them if the Commission approves the proposal.
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\43\ See Snyder and Applebaum Letter.
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E. Monitoring Implementation
One commenter recommended that the Task Force monitor the
implementation of the proposed guidance, including by polling
arbitrators and claimants' counsel, and suggested possible follow-up
action if FINRA's general guidance proves insufficient.\44\ Similarly,
another commenter encouraged FINRA and the Commission to monitor the
extent to which the proposed amendments satisfy parties' discovery
needs.\45\ FINRA responded that it will monitor implementation of the
proposed rule change and work with the Task Force to design a survey
for parties and arbitrators that would gauge the success of the new
guidance. FINRA stated that, depending on its findings, it would then
consider next steps.
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\44\ See PIABA Letter.
\45\ See Smiley Letter.
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IV. Discussion and Commission Findings
After carefully considering the proposal, the comments submitted,
and FINRA's response to the comments, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Exchange Act and rules and regulations
thereunder applicable to a national securities association.\46\ In
particular, the Commission finds that the proposed rule change is
consistent with Exchange Act Section 15A(b)(6),\47\ which requires,
among other things, that the rules of a national securities association
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\46\ In approving the proposed rule change, the Commission has
considered the impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\47\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposed amendments to the Guide
would improve the arbitration process for the benefit of public
investors, broker-dealer firms, and associated persons who use the
FINRA Forum. Specifically, the Commission believes that the proposed
amendments would, among other things, help reduce the number and limit
the scope of disputes involving document production and other matters,
particularly with regard to e-discovery and product cases.
The Commission has considered the commenters' views on the proposed
rule change and believes that FINRA responded appropriately to the
concerns raised. The Commission believes that, as FINRA noted in its
response letter, many of the comments have been addressed by the
proposed amendments or will be addressed through arbitrator training.
The Commission notes that FINRA stated that it consulted with the Task
Force in developing its responses to commenters. Moreover, FINRA stated
that it has committed to consult with the Task Force on its arbitrator
training
[[Page 57921]]
materials, and will continue to work with the Task Force to monitor
implementation of the proposed amendments. In addition, FINRA stated
that it will share the results of its survey with the Task Force and
consider any recommendations that Task Force makes for further
improvements to the Guide.
For the reasons stated above, the Commission finds that the rule
change is consistent with the Act and the rules and regulations
thereunder.
V. Conclusion
It is therefore ordered, pursuant to Exchange Act Section 19(b)(2)
\48\ that the proposed rule change (SR-FINRA-2013-024), as modified by
Amendment No. 1, be, and hereby is, approved.
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\48\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22883 Filed 9-19-13; 8:45 am]
BILLING CODE 8011-01-P
