Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Expand Time for Non-Parties To Respond to Arbitration Subpoenas and Orders of Appearance of Witnesses or Production of Documents, 20669-20671 [2019-09633]

Download as PDF Federal Register / Vol. 84, No. 91 / Friday, May 10, 2019 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–85781; File No. SR–FINRA– 2019–004] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Expand Time for Non-Parties To Respond to Arbitration Subpoenas and Orders of Appearance of Witnesses or Production of Documents May 6, 2019. I. Introduction On January 29, 2019, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 12512(d) through (e) and FINRA Rule 12513(d) through (e) of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and FINRA Rule 13512(d) through (e) and FINRA Rule 13513(d) through (e) of the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’ and together, ‘‘Codes’’), to expand the time for non-parties to respond to arbitration subpoenas and orders of appearance of witnesses or production of documents, and to make related changes to enhance the discovery process for forum users. The proposed rule change was published for comment in the Federal Register on February 12, 2019.3 The public comment period closed on March 5, 2019. The Commission received four comment letters in response to the Notice, all supporting the proposed rule change.4 On April 22, 2019, FINRA responded to the comment letters received in response to the Notice.5 On 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Exchange Act Release No. 85063 (Feb. 6, 2019), 84 FR 3518 (Feb. 12, 2019) (File No. SR– FINRA–2019–004) (‘‘Notice’’). 4 See Letter from Steven B. Caruso, Maddox Hargett Caruso, P.C., dated February 11, 2019 (‘‘Caruso Letter’’); letter from Christine Lazaro, Public Investors Arbitration Bar Association (‘‘PIABA’’), dated February 22, 2019 (‘‘PIABA Letter’’); letter from William Jacobson, Cornell Securities Law Clinic, dated March 1, 2019 (‘‘Cornell Letter’’); and letter from Nicole Iannarone, Georgia State University College of Law, dated March 5, 2019 (‘‘Georgia State Letter’’). Comment letters are available on the Commission’s website at https://www.sec.gov. 5 See Letter from Kristine A. Vo, Principal Counsel, FINRA, to Ms. Vanessa Countryman, Acting Secretary, U.S. Securities and Exchange Commission, dated April 22, 2019 (‘‘FINRA Letter’’). The FINRA Letter is available on FINRA’s website at https://www.finra.org, at the principal khammond on DSKBBV9HB2PROD with NOTICES 2 17 VerDate Sep<11>2014 17:03 May 09, 2019 Jkt 247001 20669 March 19, 2019, FINRA extended the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to May 13, 2019.6 This order approves the proposed rule change. party and as an option for the non-party to file the objection to the scope or propriety of the order or subpoena; 12 and (3) codify the current practice that the Director sends, at the same time, objections and responses to the panel after the reply date has elapsed, unless otherwise directed by the panel.13 II. Description of the Proposed Rule Change 7 III. Comment Summary Parties exchange documents and information to prepare for an arbitration through the discovery process. The Codes currently provide that parties in FINRA arbitration who seek discovery from a non-party may request the panel to issue: (1) An order of appearance of witnesses or production of documents if the non-party is subject to FINRA’s jurisdiction as an associated person or member firm or (2) a subpoena if the non-party is not subject to FINRA’s jurisdiction.8 If the panel decides to issue the order or subpoena, FINRA will transmit the signed order or subpoena to the moving party to serve on the nonparty.9 If a non-party receiving an order or a subpoena objects to the scope or propriety of the order or subpoena, the non-party may, within 10 calendar days of service of the order or subpoena, file written objections through the Director of the Office of Dispute Resolution (Director).10 FINRA is proposing three amendments to the Codes to enhance the discovery process for forum users, particularly non-parties. Specifically, FINRA is proposing to amend the Codes to: (1) Extend the response time for nonparties to object to an order or subpoena from 10 calendar days of service to 15 calendar days of receipt of the order or subpoena; 11 (2) exclude first-class mail as an option to serve documents on a nonoffice of FINRA, on the Commission’s website at https://www.sec.gov/comments/sr-finra-2019-004/ srfinra2019004.htm, and at the Commission’s Public Reference Room. 6 See Letter from Kristine A. Vo, Principal Counsel, FINRA, to Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, Division of Trading and Markets, Securities and Exchange Commission, dated March 19, 2019. 7 The subsequent description of the proposed rule change is substantially excerpted from FINRA’s description in the Notice. See Notice, 84 FR at 3518–3519. 8 See Rules 12512 and 12513. See also Rules 13512 and 13513. 9 See Notice, 84 FR at 3518. 10 See Rules 12512 and 12513. See also Rules 13512 and 13513. 11 Receipt of overnight mail service, overnight delivery service, hand delivery, email or facsimile is accomplished on the date of delivery. See Notice, 84 FR at 3519, n. 8. PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 Supportive Comments As noted above, the Commission received four comment letters on the proposed rule change.14 Overall, all four commenters support the proposal and believe that it represents a fair and reasonable approach to helping expedite the arbitration process.15 More specifically, all four commenters explained that the extension of time to respond to an order or subpoena would help ensure that non-parties have sufficient time to respond to an order or subpoena during arbitration and enhance the discovery process for forum users.16 The commenters also believe that FINRA’s proposed change to the acceptable methods of service would help enable forum users to ‘‘better facilitate and confirm service of subpoenas and orders.’’ 17 One 12 Filing and service by first-class mail is accomplished on the date of mailing, but it can take several days to confirm receipt. For purposes of this rule proposal, service by overnight mail, overnight delivery, hand delivery, facsimile or email is accomplished on the date of delivery. 13 FINRA states that the Director sends the complete set of motion papers to the panel to ensure that the panel receives the advocacy positions of all parties at the same time. 14 See supra note 4. 15 See Caruso Letter (stating that ‘‘proposed changes would be a fair, equitable and reasonable approach that would expedite and facilitate the efficiency of the arbitration process . . . ’’; PIABA Letter (supporting the proposed rule changes ‘‘insofar as they strike a good balance between promoting fast and efficient discovery and allowing for the normal internal operations of third parties to work to respond to subpoenas and orders.’’); Georgia State Letter (stating that the proposal would ‘‘promote speed and efficiency in arbitration’’); and Cornell Letter (stating that the proposal is an important step towards ‘‘enhancing the discovery process for forum users.’’). 16 See Cornell Letter. See also Caruso Letter (stating that ‘‘the proposed amendments would address forum users concerns and would help ensure that non-parties wanting to object to an order or subpoena have sufficient time to do so.’’); PIABA Letter (supporting ‘‘the proposed rule changes, insofar as they strike a good balance between promoting fast and efficient discovery and allowing for the normal internal operations of third parties to work to respond to subpoenas and orders.’’); Georgia State Letter (stating that patterning its rule on those of other fora would create familiarity with the process, resulting in ‘‘more timely answers from non-parties and FINRA spending less time enforcing orders and subpoenas that were not answered.’’). 17 PIABA Letter. See also Georgia State Letter (stating that the proposal would ‘‘enhance the speed E:\FR\FM\10MYN1.SGM Continued 10MYN1 20670 Federal Register / Vol. 84, No. 91 / Friday, May 10, 2019 / Notices commenter states that the new acceptable service methods would further its efforts to ‘‘provide no-cost advocacy to retail investors who cannot obtain legal representation because [they] do not cost anything.’’ 18 This commenter also supports the proposed fifteen-day response deadline because ‘‘it would promote speed and efficiency in arbitration.’’ 19 khammond on DSKBBV9HB2PROD with NOTICES Additional Guidance One commenter suggests that FINRA amend the proposal to use service (instead of receipt) as the trigger for determining response deadlines.20 Specifically, the commenter believes that the use of ‘‘receipt’’ instead of ‘‘service’’ as a trigger for responses ‘‘introduces uncertainty into the process [because w]hile service can be verified, a serving party may not be aware of when a request is received by a third party.’’ 21 The commenter also points out that ‘‘other similar forums currently use service and not receipt as the trigger for calculating a response deadline.’’ 22 In response, FINRA explains that the receipt of overnight mail service, overnight delivery service, hand delivery, email, or facsimile is accomplished on the date of delivery.23 Accordingly, FINRA believes that parties will be able to determine the date of delivery because, other than for overnight mail service and overnight delivery service, typically delivery will be the same date as service.24 FINRA also states that the rule change excludes first class mail as an option to serve documents on a non-party, in part, because it may be difficult to determine the date of delivery and, thereby, receipt.25 For these reasons, FINRA did not take commenter’s recommended change. Similarly, another commenter recommends that FINRA adopt a certified mail option to ‘‘verify when the order or subpoena was received.’’ 26 In response, FINRA states that service by overnight mail, overnight delivery, hand of and lower costs in arbitration by amending the methods of service.’’); Caruso Letter (stating that the proposal ‘‘enable forum users to be better able to confirm and facilitate the timing of discovery obligations.’’); Cornell Letter (predicting that the new proposed service methods would ‘‘speed[] up the time it takes to serve documents to nonparties.’’). 18 Georgia State Letter. 19 Id. 20 See id. 21 Georgia State Letter. 22 Id. (stating that service is the trigger for responses in federal court, in the JAMS arbitration forum, and to SEC and FTC requests). 23 See supra note 5; see also Notice. 24 See FINRA Letter. 25 Id. 26 See Cornell Letter. VerDate Sep<11>2014 17:03 May 09, 2019 Jkt 247001 delivery, email, or facsimile allow the parties to verify both the date of delivery and receipt and, therefore, certified mail is unnecessary.27 Accordingly, FINRA did not take the commenters recommended change. IV. Discussion and Commission Findings After careful review of the proposed rule change and the comment letters, the Commission finds that the proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association.28 Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act,29 which requires, among other things, that FINRA rules 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. The Commission agrees with FINRA and the commenters that the proposed rule changes would protect investors and the public interest by improving the FINRA arbitration forum for the parties that use it.30 As stated in the proposal, forum users have expressed concerns about the amount of time that non-parties have to respond to orders and subpoenas 31 since the individual at a non-party firm who is responsible for responding to an order or subpoena may not actually receive a copy of the order or subpoena until after the tenth day from service has passed.32 Once the objection to an order or subpoena is waived, the non-party must respond to the order or subpoena 27 Id. 28 In approving this rule change, the Commission has considered the rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 29 15 U.S.C. 78o–3(b)(6). 30 See supra note 15; see also FINRA Letter. 31 See Notice, 84 FR at 3818–3519, n. 4 (citing a letter from Kevin M. Carroll, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Jennifer Piorko Mitchell, Vice President and Deputy Corporate Secretary, FINRA, dated June 2, 2017 (responding to FINRA’s March 2017 Special Notice on FINRA’s engagement programs), www.finra.org/sites/default/ files/notice_comment_file_ref/SN-32117_SIFMAKevinCarroll_comment.pdf). 32 See FINRA Notice at 3519 (Non-parties do not have access to the Dispute Resolution Party Portal (Party Portal). As a result, they are currently served using other means, such as first-class mail, overnight mail service, overnight delivery service, hand delivery, email, or facsimile. Consequently, a firm that is a non-party to an arbitration is not able to anticipate the arrival of an order or subpoena and instruct front-line employees to route these high priority documents to the appropriate individual responsible for responding to the discovery request). PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 or risk incurring sanctions or disciplinary action.33 Consequently, the Commission believes the extension from 10 calendar days of service to 15 calendar days of receipt of the order or subpoena would address forum users’ concerns because the proposal would help to provide sufficient time to nonparties wanting to object to an order or subpoena. Consequently, we also believe that the proposal would also help prevent accidental waivers that could cause sanctions or disciplinary action, protest, and thus further delays in resolving arbitration claims between parties. The Commission acknowledges one commenter’s concern that adopting a trigger for response to a subpoena or order date based on the date of ‘‘receipt’’ rather than the date of ‘‘service’’ may cause confusion since ‘‘a serving party may not be aware of when a request is received by a third party.’’ 34 However, we are also concerned that a non-party to the arbitration may not be able to anticipate the arrival of an order or subpoena, which could lead to inadvertently waiving its right to object. In addition, we note FINRA’s statement that parties will be able to determine the date of delivery because, other than for overnight mail service and overnight delivery service, typically delivery will be the same date as service.35 In sum, the Commission believes that the risks related to the inability to anticipate receipt of a subpoena or order support adopting a trigger date based on the date of receipt rather than the date of service. The Commission also acknowledges another commenter’s request to adopt a certified mail delivery option.36 However, the Commission also notes that service by overnight mail, overnight delivery, hand delivery, email, or facsimile will allow the parties to verify both the date of delivery and receipt.37 Therefore, on balance, the Commission believes that the proposed available delivery options will accommodate the commenter’s concern.38 The Commission also agrees with FINRA’s proposal to exclude first-class mail as an option to serve documents on the non-party and as an option for the non-party to file the objection to the scope or propriety of the order or subpoena. As stated in the proposal, forum users have previously raised concerns that the use of first-class mail 33 See FINRA Notice at 3519 (citing Rules 12212 and 12511). See also Rules 13212 and 13511). 34 Georgia State Letter. 35 See FINRA Letter. 36 See Cornell Letter. 37 See FINRA Letter. 38 Id. E:\FR\FM\10MYN1.SGM 10MYN1 Federal Register / Vol. 84, No. 91 / Friday, May 10, 2019 / Notices is too slow and thus slows down the discovery process.39 The Commission agrees that by requiring forum users to serve or transmit discovery-related documents through overnight mail service, overnight delivery, hand delivery, email, or facsimile, the proposal would help forum users confirm and expedite discovery, and therefore expedite the arbitration process. Finally, the Commission supports the proposal’s codification of the current practice that the Director sends, at the same time, objections and responses to the panel after the reply date has elapsed, unless otherwise directed by the panel. This ensures that all members on the panel receive all the parties’ advocacy positions at the same time. The Commission agrees that the proposed rule change will enhance forum users’ understanding of existing case administration procedures and will improve transparency concerning forum operations.40 V. Conclusion It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act 41 that the proposal (SR–FINRA–2019– 004), be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.42 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–09633 Filed 5–9–19; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–85782; File No. SR–ICEEU– 2019–009] Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to the ICE Clear Europe Operational Risk Management Policy (‘‘ORM Policy’’) 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 May 1, 39 See FINRA Notice at 3519. FINRA Notice at 3519 (FINRA notes that the proposed rule change would impact all members, including members that are funding portals or have elected to be treated as capital acquisition brokers (‘‘CABs’’), given that the funding portal and CAB rule sets incorporate the impacted FINRA rules by reference). 41 15 U.S.C. 78s(b)(2). 42 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. khammond on DSKBBV9HB2PROD with NOTICES 40 See VerDate Sep<11>2014 17:03 May 09, 2019 Jkt 247001 I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change ICE Clear Europe proposes to formalize its Operational Risk Management Policy (‘‘ORM Policy’’), which consolidates its practices with respect to management of operational risk. The revisions do not involve any changes to the ICE Clear Europe Clearing Rules or Procedures.3 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION May 6, 2019. 2019, ICE Clear Europe Limited (‘‘ICE Clear Europe’’ or the ‘‘Clearing House’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule changes described in Items I, II, and III below, which Items have been prepared primarily by ICE Clear Europe. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. (a) Purpose ICE Clear Europe is proposing to formalize its ORM Policy which sets out the Clearing House’s processes for managing operational risks, the stakeholders responsible for executing those processes, the frequency of review of the policy and the governance and reporting lines for the policy. The ORM Policy addresses operational risk, which it defines as the risk of an event occurring which negatively impacts the achievement of business objectives resulting from inadequate or failed internal operational controls, people, systems or external events.4 The ORM Policy establishes an 3 Capitalized terms used but not defined herein have the meanings specified in the ICE Clear Europe Clearing Rules (the ‘‘Rules’’). 4 The ORM Policy notes several non-exhaustive examples of operational risk, including risks from internal and external fraud, employment practices and workplace safety, clients, products and business practices, damage to physical assets and business disruption and system failures. PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 20671 overall process that identifies, assesses, responds to, monitors and reports operational risk. Risk Identification: Risk identification is performed by the business areas and lines exposed to the risk (referred to as ‘‘risk owners’’) at least once each year, and is overseen by the Risk Oversight Department. Risk owners must map their existing processes, linking them to business objectives and identify operational risks where an event might negatively impact the achievement of a business objective. Risk sources must also be identified. Risk Assessment: Risk assessment is conducted by the risk owners at least once per year in conjunction with risk identification. The potential impact of the risk, including its potential severity and likelihood, are to be evaluated. More frequent ad hoc assessments may be necessary if risks emerge or disappear between annual reviews. For most operational risks, control mechanisms may already exist, in which case uncontrolled and controlled impacts are measured. Risk owners must also assess the sufficiency of existing control mechanisms on a quarterly or, if necessary, a more frequent ad hoc basis. Risk Response: Risk owners are responsible for proposing and implementing remedial actions, which must be approved by the ICE Clear Europe Executive Risk Committee (the ‘‘ERC’’). Depending upon the potential expected impact of the operational risk and the Clearing House risk appetite, the four possible responses to a risk are to treat or mitigate the risk, tolerate or accept the risk, transfer the risk to another party (such as through insurance) or terminate the activity carrying the risk. Risk Monitoring: Risk owners must monitor the identified operational risk daily through the use of key performance indicators, key risk indicators and other risk indicators such as their own management limits. The Risk Oversight Department itself monitors risks daily through risk appetite metrics and management thresholds as well as operational incidents raised by the risk owners. Risk owners and the Risk Oversight Department also must monitor the performance of control mechanisms on a regular and frequent basis. Risk Reporting and Oversight: Overall oversight of the policy rests with the Audit Committee and Risk Oversight Department. Specifically, the results of risk assessments must be reported to the Audit Committee and the Board Risk Committee (the ‘‘BRC’’) when material changes are observed. Control E:\FR\FM\10MYN1.SGM 10MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 91 (Friday, May 10, 2019)]
[Notices]
[Pages 20669-20671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09633]



[[Page 20669]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85781; File No. SR-FINRA-2019-004]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Expand Time 
for Non-Parties To Respond to Arbitration Subpoenas and Orders of 
Appearance of Witnesses or Production of Documents

May 6, 2019.

I. Introduction

    On January 29, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 12512(d) 
through (e) and FINRA Rule 12513(d) through (e) of the Code of 
Arbitration Procedure for Customer Disputes (``Customer Code'') and 
FINRA Rule 13512(d) through (e) and FINRA Rule 13513(d) through (e) of 
the Code of Arbitration Procedure for Industry Disputes (``Industry 
Code'' and together, ``Codes''), to expand the time for non-parties to 
respond to arbitration subpoenas and orders of appearance of witnesses 
or production of documents, and to make related changes to enhance the 
discovery process for forum users.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on February 12, 2019.\3\ The public comment period closed on 
March 5, 2019. The Commission received four comment letters in response 
to the Notice, all supporting the proposed rule change.\4\ On April 22, 
2019, FINRA responded to the comment letters received in response to 
the Notice.\5\ On March 19, 2019, FINRA extended the time period in 
which the Commission must approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to approve or disapprove the proposed rule change to May 13, 2019.\6\ 
This order approves the proposed rule change.
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 85063 (Feb. 6, 2019), 84 FR 
3518 (Feb. 12, 2019) (File No. SR-FINRA-2019-004) (``Notice'').
    \4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso, 
P.C., dated February 11, 2019 (``Caruso Letter''); letter from 
Christine Lazaro, Public Investors Arbitration Bar Association 
(``PIABA''), dated February 22, 2019 (``PIABA Letter''); letter from 
William Jacobson, Cornell Securities Law Clinic, dated March 1, 2019 
(``Cornell Letter''); and letter from Nicole Iannarone, Georgia 
State University College of Law, dated March 5, 2019 (``Georgia 
State Letter''). Comment letters are available on the Commission's 
website at https://www.sec.gov.
    \5\ See Letter from Kristine A. Vo, Principal Counsel, FINRA, to 
Ms. Vanessa Countryman, Acting Secretary, U.S. Securities and 
Exchange Commission, dated April 22, 2019 (``FINRA Letter''). The 
FINRA Letter is available on FINRA's website at https://www.finra.org, at the principal office of FINRA, on the Commission's 
website at https://www.sec.gov/comments/sr-finra-2019-004/srfinra2019004.htm, and at the Commission's Public Reference Room.
    \6\ See Letter from Kristine A. Vo, Principal Counsel, FINRA, to 
Lourdes Gonzalez, Assistant Chief Counsel--Sales Practices, Division 
of Trading and Markets, Securities and Exchange Commission, dated 
March 19, 2019.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change ⁷
---------------------------------------------------------------------------

    \7\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 84 FR at 3518-3519.
---------------------------------------------------------------------------

    Parties exchange documents and information to prepare for an 
arbitration through the discovery process. The Codes currently provide 
that parties in FINRA arbitration who seek discovery from a non-party 
may request the panel to issue: (1) An order of appearance of witnesses 
or production of documents if the non-party is subject to FINRA's 
jurisdiction as an associated person or member firm or (2) a subpoena 
if the non-party is not subject to FINRA's jurisdiction.\8\ If the 
panel decides to issue the order or subpoena, FINRA will transmit the 
signed order or subpoena to the moving party to serve on the non-
party.\9\ If a non-party receiving an order or a subpoena objects to 
the scope or propriety of the order or subpoena, the non-party may, 
within 10 calendar days of service of the order or subpoena, file 
written objections through the Director of the Office of Dispute 
Resolution (Director).\10\
---------------------------------------------------------------------------

    \8\ See Rules 12512 and 12513. See also Rules 13512 and 13513.
    \9\ See Notice, 84 FR at 3518.
    \10\ See Rules 12512 and 12513. See also Rules 13512 and 13513.
---------------------------------------------------------------------------

    FINRA is proposing three amendments to the Codes to enhance the 
discovery process for forum users, particularly non-parties. 
Specifically, FINRA is proposing to amend the Codes to:
    (1) Extend the response time for non-parties to object to an order 
or subpoena from 10 calendar days of service to 15 calendar days of 
receipt of the order or subpoena; \11\
---------------------------------------------------------------------------

    \11\ Receipt of overnight mail service, overnight delivery 
service, hand delivery, email or facsimile is accomplished on the 
date of delivery. See Notice, 84 FR at 3519, n. 8.
---------------------------------------------------------------------------

    (2) exclude first-class mail as an option to serve documents on a 
non-party and as an option for the non-party to file the objection to 
the scope or propriety of the order or subpoena; \12\ and
---------------------------------------------------------------------------

    \12\ Filing and service by first-class mail is accomplished on 
the date of mailing, but it can take several days to confirm 
receipt. For purposes of this rule proposal, service by overnight 
mail, overnight delivery, hand delivery, facsimile or email is 
accomplished on the date of delivery.
---------------------------------------------------------------------------

    (3) codify the current practice that the Director sends, at the 
same time, objections and responses to the panel after the reply date 
has elapsed, unless otherwise directed by the panel.\13\
---------------------------------------------------------------------------

    \13\ FINRA states that the Director sends the complete set of 
motion papers to the panel to ensure that the panel receives the 
advocacy positions of all parties at the same time.
---------------------------------------------------------------------------

III. Comment Summary

Supportive Comments

    As noted above, the Commission received four comment letters on the 
proposed rule change.\14\ Overall, all four commenters support the 
proposal and believe that it represents a fair and reasonable approach 
to helping expedite the arbitration process.\15\ More specifically, all 
four commenters explained that the extension of time to respond to an 
order or subpoena would help ensure that non-parties have sufficient 
time to respond to an order or subpoena during arbitration and enhance 
the discovery process for forum users.\16\ The commenters also believe 
that FINRA's proposed change to the acceptable methods of service would 
help enable forum users to ``better facilitate and confirm service of 
subpoenas and orders.'' \17\ One

[[Page 20670]]

commenter states that the new acceptable service methods would further 
its efforts to ``provide no-cost advocacy to retail investors who 
cannot obtain legal representation because [they] do not cost 
anything.'' \18\ This commenter also supports the proposed fifteen-day 
response deadline because ``it would promote speed and efficiency in 
arbitration.'' \19\
---------------------------------------------------------------------------

    \14\ See supra note 4.
    \15\ See Caruso Letter (stating that ``proposed changes would be 
a fair, equitable and reasonable approach that would expedite and 
facilitate the efficiency of the arbitration process . . . ''; PIABA 
Letter (supporting the proposed rule changes ``insofar as they 
strike a good balance between promoting fast and efficient discovery 
and allowing for the normal internal operations of third parties to 
work to respond to subpoenas and orders.''); Georgia State Letter 
(stating that the proposal would ``promote speed and efficiency in 
arbitration''); and Cornell Letter (stating that the proposal is an 
important step towards ``enhancing the discovery process for forum 
users.'').
    \16\ See Cornell Letter. See also Caruso Letter (stating that 
``the proposed amendments would address forum users concerns and 
would help ensure that non-parties wanting to object to an order or 
subpoena have sufficient time to do so.''); PIABA Letter (supporting 
``the proposed rule changes, insofar as they strike a good balance 
between promoting fast and efficient discovery and allowing for the 
normal internal operations of third parties to work to respond to 
subpoenas and orders.''); Georgia State Letter (stating that 
patterning its rule on those of other fora would create familiarity 
with the process, resulting in ``more timely answers from non-
parties and FINRA spending less time enforcing orders and subpoenas 
that were not answered.'').
    \17\ PIABA Letter. See also Georgia State Letter (stating that 
the proposal would ``enhance the speed of and lower costs in 
arbitration by amending the methods of service.''); Caruso Letter 
(stating that the proposal ``enable forum users to be better able to 
confirm and facilitate the timing of discovery obligations.''); 
Cornell Letter (predicting that the new proposed service methods 
would ``speed[] up the time it takes to serve documents to non-
parties.'').
    \18\ Georgia State Letter.
    \19\ Id.
---------------------------------------------------------------------------

Additional Guidance

    One commenter suggests that FINRA amend the proposal to use service 
(instead of receipt) as the trigger for determining response 
deadlines.\20\ Specifically, the commenter believes that the use of 
``receipt'' instead of ``service'' as a trigger for responses 
``introduces uncertainty into the process [because w]hile service can 
be verified, a serving party may not be aware of when a request is 
received by a third party.'' \21\ The commenter also points out that 
``other similar forums currently use service and not receipt as the 
trigger for calculating a response deadline.'' \22\
---------------------------------------------------------------------------

    \20\ See id.
    \21\ Georgia State Letter.
    \22\ Id. (stating that service is the trigger for responses in 
federal court, in the JAMS arbitration forum, and to SEC and FTC 
requests).
---------------------------------------------------------------------------

    In response, FINRA explains that the receipt of overnight mail 
service, overnight delivery service, hand delivery, email, or facsimile 
is accomplished on the date of delivery.\23\ Accordingly, FINRA 
believes that parties will be able to determine the date of delivery 
because, other than for overnight mail service and overnight delivery 
service, typically delivery will be the same date as service.\24\ FINRA 
also states that the rule change excludes first class mail as an option 
to serve documents on a non-party, in part, because it may be difficult 
to determine the date of delivery and, thereby, receipt.\25\ For these 
reasons, FINRA did not take commenter's recommended change.
---------------------------------------------------------------------------

    \23\ See supra note 5; see also Notice.
    \24\ See FINRA Letter.
    \25\ Id.
---------------------------------------------------------------------------

    Similarly, another commenter recommends that FINRA adopt a 
certified mail option to ``verify when the order or subpoena was 
received.'' \26\ In response, FINRA states that service by overnight 
mail, overnight delivery, hand delivery, email, or facsimile allow the 
parties to verify both the date of delivery and receipt and, therefore, 
certified mail is unnecessary.\27\ Accordingly, FINRA did not take the 
commenters recommended change.
---------------------------------------------------------------------------

    \26\ See Cornell Letter.
    \27\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposed rule change and the comment 
letters, the Commission finds that the proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to a national securities 
association.\28\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\29\ which requires, among other things, that FINRA rules 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. The Commission agrees with 
FINRA and the commenters that the proposed rule changes would protect 
investors and the public interest by improving the FINRA arbitration 
forum for the parties that use it.\30\
---------------------------------------------------------------------------

    \28\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78o-3(b)(6).
    \30\ See supra note 15; see also FINRA Letter.
---------------------------------------------------------------------------

    As stated in the proposal, forum users have expressed concerns 
about the amount of time that non-parties have to respond to orders and 
subpoenas \31\ since the individual at a non-party firm who is 
responsible for responding to an order or subpoena may not actually 
receive a copy of the order or subpoena until after the tenth day from 
service has passed.\32\ Once the objection to an order or subpoena is 
waived, the non-party must respond to the order or subpoena or risk 
incurring sanctions or disciplinary action.\33\ Consequently, the 
Commission believes the extension from 10 calendar days of service to 
15 calendar days of receipt of the order or subpoena would address 
forum users' concerns because the proposal would help to provide 
sufficient time to non-parties wanting to object to an order or 
subpoena. Consequently, we also believe that the proposal would also 
help prevent accidental waivers that could cause sanctions or 
disciplinary action, protest, and thus further delays in resolving 
arbitration claims between parties.
---------------------------------------------------------------------------

    \31\ See Notice, 84 FR at 3818-3519, n. 4 (citing a letter from 
Kevin M. Carroll, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association, to Jennifer 
Piorko Mitchell, Vice President and Deputy Corporate Secretary, 
FINRA, dated June 2, 2017 (responding to FINRA's March 2017 Special 
Notice on FINRA's engagement programs), www.finra.org/sites/default/files/notice_comment_file_ref/SN-32117_SIFMA-KevinCarroll_comment.pdf).
    \32\ See FINRA Notice at 3519 (Non-parties do not have access to 
the Dispute Resolution Party Portal (Party Portal). As a result, 
they are currently served using other means, such as first-class 
mail, overnight mail service, overnight delivery service, hand 
delivery, email, or facsimile. Consequently, a firm that is a non-
party to an arbitration is not able to anticipate the arrival of an 
order or subpoena and instruct front-line employees to route these 
high priority documents to the appropriate individual responsible 
for responding to the discovery request).
    \33\ See FINRA Notice at 3519 (citing Rules 12212 and 12511). 
See also Rules 13212 and 13511).
---------------------------------------------------------------------------

    The Commission acknowledges one commenter's concern that adopting a 
trigger for response to a subpoena or order date based on the date of 
``receipt'' rather than the date of ``service'' may cause confusion 
since ``a serving party may not be aware of when a request is received 
by a third party.'' \34\ However, we are also concerned that a non-
party to the arbitration may not be able to anticipate the arrival of 
an order or subpoena, which could lead to inadvertently waiving its 
right to object. In addition, we note FINRA's statement that parties 
will be able to determine the date of delivery because, other than for 
overnight mail service and overnight delivery service, typically 
delivery will be the same date as service.\35\ In sum, the Commission 
believes that the risks related to the inability to anticipate receipt 
of a subpoena or order support adopting a trigger date based on the 
date of receipt rather than the date of service.
---------------------------------------------------------------------------

    \34\ Georgia State Letter.
    \35\ See FINRA Letter.
---------------------------------------------------------------------------

    The Commission also acknowledges another commenter's request to 
adopt a certified mail delivery option.\36\ However, the Commission 
also notes that service by overnight mail, overnight delivery, hand 
delivery, email, or facsimile will allow the parties to verify both the 
date of delivery and receipt.\37\ Therefore, on balance, the Commission 
believes that the proposed available delivery options will accommodate 
the commenter's concern.\38\
---------------------------------------------------------------------------

    \36\ See Cornell Letter.
    \37\ See FINRA Letter.
    \38\ Id.
---------------------------------------------------------------------------

    The Commission also agrees with FINRA's proposal to exclude first-
class mail as an option to serve documents on the non-party and as an 
option for the non-party to file the objection to the scope or 
propriety of the order or subpoena. As stated in the proposal, forum 
users have previously raised concerns that the use of first-class mail

[[Page 20671]]

is too slow and thus slows down the discovery process.\39\ The 
Commission agrees that by requiring forum users to serve or transmit 
discovery-related documents through overnight mail service, overnight 
delivery, hand delivery, email, or facsimile, the proposal would help 
forum users confirm and expedite discovery, and therefore expedite the 
arbitration process.
---------------------------------------------------------------------------

    \39\ See FINRA Notice at 3519.
---------------------------------------------------------------------------

    Finally, the Commission supports the proposal's codification of the 
current practice that the Director sends, at the same time, objections 
and responses to the panel after the reply date has elapsed, unless 
otherwise directed by the panel. This ensures that all members on the 
panel receive all the parties' advocacy positions at the same time. The 
Commission agrees that the proposed rule change will enhance forum 
users' understanding of existing case administration procedures and 
will improve transparency concerning forum operations.\40\
---------------------------------------------------------------------------

    \40\ See FINRA Notice at 3519 (FINRA notes that the proposed 
rule change would impact all members, including members that are 
funding portals or have elected to be treated as capital acquisition 
brokers (``CABs''), given that the funding portal and CAB rule sets 
incorporate the impacted FINRA rules by reference).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \41\ that the proposal (SR-FINRA-2019-004), be and hereby 
is approved.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78s(b)(2).
    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09633 Filed 5-9-19; 8:45 am]
 BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.