Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 12800 (Simplified Arbitration) To Clarify and Amend the Applicability of the Document Production Lists, 46210-46214 [2024-11584]
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Federal Register / Vol. 89, No. 103 / Tuesday, May 28, 2024 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–11572 Filed 5–24–24; 8:45 am]
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–100204; File No. SR–
FINRA–2024–008]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 12800 (Simplified
Arbitration) To Clarify and Amend the
Applicability of the Document
Production Lists
May 21, 2024.
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 13,
2024, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend the
FINRA Code of Arbitration Procedure
for Customer Disputes (‘‘Customer
Code’’) to clarify and, in some instances,
amend the applicability of the
Document Production Lists to
simplified customer arbitrations
administered under FINRA Rule 12800.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
37 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
I. Overview of the Document Production
Lists and Simplified Customer
Arbitrations
FINRA Dispute Resolution Services
(‘‘DRS’’) provides a Discovery Guide to
supplement the discovery rules
contained in the Customer Code and
help guide the parties and arbitrators
through the discovery process in
customer arbitrations.3 The Document
Production Lists, which are included in
the Discovery Guide and described in
FINRA Rule 12506, outline
presumptively discoverable documents
that the parties should exchange,
without arbitrator or DRS staff
intervention. Document Production
Lists 1 and 2 describe the documents
that are presumed to be discoverable in
all arbitrations between a customer and
a member firm or associated person
except in simplified customer
arbitrations as explained below.4 List 1
outlines the documents that member
firms and associated persons shall
produce; List 2 outlines the documents
that customers shall produce.5
The proposed rule change would
affect the applicability of the Document
Production Lists in simplified customer
arbitrations. Simplified customer
arbitrations are arbitrations in which the
dispute between a customer and
member firm or associated person
involves $50,000 or less, exclusive of
interest and expenses.6 There are three
types of simplified customer
arbitrations. If the customer does not
request a hearing, the arbitrator will
render an award based on the pleadings
and other materials submitted by the
parties (‘‘paper cases’’).7 If the customer
requests a hearing, the customer must
select between one of two hearing
options.8 If the customer requests an
3 See https://www.finra.org/sites/default/files/
ArbMed/p394527.pdf. The FINRA Discovery Guide
and Document Production Lists do not apply to
arbitrations administered under the Code of
Arbitration Procedure for Industry Disputes.
4 See FINRA Rule 12506(a).
5 See https://www.finra.org/sites/default/files/
ArbMed/p394527.pdf.
6 See FINRA Rule 12800(a).
7 See FINRA Rule 12800(c)(2).
8 See FINRA Rule 12800(c)(3).
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Option One hearing under FINRA Rule
12800(c)(3)(A), the regular provisions of
the Customer Code relating to
prehearings and hearings, including all
fee provisions, apply (‘‘regular
hearing’’). The customer may also
request an Option Two special
proceeding, an abbreviated hearing,
under FINRA Rule 12800(c)(3)(B)
(‘‘special proceeding’’).
Currently, the Document Production
Lists do not apply in paper cases and
special proceedings.9 However, under
FINRA Rule 12800(g)(1), the arbitrator
may exercise discretion to choose to use
relevant portions of the Document
Production Lists in paper cases and
special proceedings ‘‘in a manner
consistent with the expedited nature of
simplified proceedings.’’ Absent such
an exercise of discretion by the
arbitrator, to obtain discovery in paper
cases and special proceedings, the
parties must request documents and
other information from each other,
pursuant to FINRA Rule 12800(g)(2).10
Therefore, under the current Customer
Code, no documents or information are
presumptively discoverable in paper
cases and special proceedings.
By contrast, the Document Production
Lists do apply in simplified customer
arbitrations in which the customer
requests a regular hearing. As noted
above, if the customer requests a regular
hearing during the simplified customer
arbitration, FINRA Rule 12800(c)(3)(A)
states that the ‘‘regular provisions’’ of
the Customer Code ‘‘relating to
prehearings and hearings’’ apply. DRS
has issued guidance clarifying this
language to mean that the Document
Production Lists apply in simplified
customer arbitrations in which the
customer requests a regular hearing.11
Consistent with this guidance, the
9 FINRA Rule 12800(g)(1) provides that the
Document Production Lists ‘‘do not apply to
arbitrations subject to this rule’’ (i.e., paper cases
and special proceedings).
10 FINRA Rule 12800(g)(2) provides that all
production requests must be served on all other
parties and filed with the Director within 30 days
from the date that the last answer is due; any
response or objection to a production request must
be served on all other parties and filed with the
Director within 10 days of the receipt of the request.
The term ‘‘Director’’ means the Director of DRS and,
unless the Customer Code provides that the Director
may not delegate a specific function, the term
includes FINRA staff to whom the Director has
delegated authority. See FINRA Rule 12100(m).
11 See FINRA DRS Party’s Reference Guide, p. 31,
https://www.finra.org/sites/default/files/PartysReference-Guide.pdf (explaining that ‘‘[t]he
Document Production Lists in the Discovery Guide
as described in FINRA Rule 12506 do not apply to
simplified [customer] arbitrations decided on the
papers or decided by special proceeding. However,
the Discovery Guide does apply to simplified cases
in which a customer requests a regular hearing.’’).
See also https://www.finra.org/arbitrationmediation/simplified-arbitrations.
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current practice is to treat the Document
Production Lists as applying in
simplified customer arbitrations in
which the customer requests a regular
hearing.12
II. The Proposed Rule Change
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A. Proposed Amendments to the
Applicability of the Document
Production Lists in Paper Cases and
Special Proceedings
The proposed rule change would
amend FINRA Rule 12800(g)(1) to give
customers in paper cases and special
proceedings the option to elect at the
time that they initiate an arbitration or,
if they are a respondent, no later than
the answer due date, whether they want
the Document Production Lists to apply
to all parties. Specifically, under
proposed Rule 12800(g)(1)(B), FINRA
Rule 12506—which describes the
Document Production Lists and sets
forth the timeframes for responding to
the Document Production Lists—would
not apply in paper cases or special
proceedings ‘‘unless the customer
requests that the Document Production
Lists apply to all parties when initiating
an arbitration pursuant to Rule 12302
or, if the customer is a respondent, no
later than the answer due date pursuant
to Rule 12303, regardless of the parties’
agreement to extend any answer due
date.’’ 13 If the customer elects to apply
the Document Production Lists in their
case, FINRA Rule 12506 would apply.
As a result, all parties would be
required to produce the documents on
the Document Production Lists, explain
why the documents cannot be
produced, or object to the production of
the documents within the timeframes
set forth in FINRA Rule 12506.14
12 For cases in which the Document Production
Lists apply, FINRA Rule 12506(b)(1) provides that
unless the parties agree otherwise, within 60 days
of the date that the answer to the statement of claim
is due, or, for parties added by amendment or third
party claim, within 60 days of the date that their
answer is due, parties must either: (1) produce to
all other parties all documents in their possession
or control that are described in Document
Production Lists 1 and 2; (2) identify and explain
the reason that specific documents described in
Document Production Lists 1 and 2 cannot be
produced within the required time, and state when
the documents will be produced, and serve this
response on all parties and file this response with
the Director; or (3) object as provided in FINRA
Rule 12508 and serve this response on all parties
and file this response with the Director.
13 FINRA Rule 12303 provides that respondent(s)
must serve each other party with an answer to the
statement of claim within 45 days of receipt of the
statement of claim. FINRA Rule 12207(a) provides
that the parties may agree in writing to extend or
modify the deadline for serving an answer.
14 A party must act in good faith when complying
with FINRA Rule 12506(b)(1). ‘‘Good faith’’ means
that a party must use its best efforts to produce all
documents required or agreed to be produced. If a
document cannot be produced in the required time,
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If the customer does not timely elect
to apply the Document Production Lists
to all parties when initiating an
arbitration or, as applicable, no later
than the answer due date, proposed
Rule 12800(g)(1)(B) would retain the
current provision in the rule that the
arbitrator has the discretion to use
relevant portions of the Document
Production Lists in a manner consistent
with the expedited nature of simplified
customer arbitrations. Additionally,
proposed Rule 12800(g)(2) would retain
the current provision in the rule that
would permit the parties to request
documents and information from each
other.
Based on feedback from customer
representatives, FINRA is concerned
that pro se 15 customers, who are the
majority of customers in paper cases
and special proceedings,16 may not
know what documents to request from
the opposing party. This lack of
understanding creates the risk that
parties may not obtain and, therefore,
are unable to provide arbitrators with
the relevant documents and information
to decide paper cases and special
proceedings. Providing customers in
paper cases and special proceedings
with the option to use the Document
Production Lists could increase
customer awareness and understanding
of the discovery process and the
likelihood that these parties are able to
discover the documents and information
that are relevant to their arbitration. If
the customer elects to use the Document
Production Lists in a paper case or
special proceeding, parties should
automatically (i.e., without the need to
make production requests or engage in
motion practice) receive those
documents and information that are
relevant, or likely to lead to relevant
evidence, in such customer disputes,
which could help expedite the
discovery process.17 In addition, this
a party must establish a reasonable timeframe to
produce the document. See FINRA Rule
12506(b)(2). If a party objects to producing any
document described in Document Production Lists
1 or 2, FINRA Rule 12508 provides that the party
must specifically identify which document or
requested information it is objecting to and why
(e.g., a document is irrelevant to the particular
dispute).
15 For purposes of the Customer Code, the term
‘‘pro se’’ refers to a party that is not represented by
an attorney or others during an arbitration or
mediation. See FINRA Rule 12100(z).
16 From 2018 to 2023, customers were a party in
1,038 paper cases and special proceedings that
closed and appeared pro se in 623 of the
arbitrations (60 percent).
17 See Securities Exchange Act Release No. 41833
(September 2, 1999), 64 FR 49256, 49260–61
(September 10, 1999) (Order Approving File No.
SR–NASD–1999–07) (stating that the Document
Production Lists were created ‘‘to provide parties
with information that is reasonably calculated to
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increased access to relevant documents
and other information could improve
the efficiency of the DRS arbitration
forum to bring about outcomes (i.e.,
awards and settlements) in paper cases
or special proceedings that are more
consistent with the merits of the case.18
If the SEC approves the proposed rule
change, FINRA will develop and
publish guidance about discovery that
will be available to all parties in
simplified customer arbitrations. The
guidance would, among other things,
direct parties to the Discovery Guide. In
addition to describing the Document
Production Lists, the Discovery Guide
includes information that could
improve the parties’ awareness and
understanding of the discovery process
such as information about the
circumstances under which the parties
may object to the production of
documents on the Document Production
Lists, the parties’ ability to request
additional documents other than those
included on the Document Production
Lists, the process for obtaining the
production of documents from nonparties, the forms that the production of
documents should take, and the parties’
right to object to the production of
documents based on confidentiality and
privilege concerns.19
As discussed above, proposed Rule
12800(g)(1)(B) would require that the
customer decide whether to apply the
Document Production Lists in a paper
case or special proceeding ‘‘when
initiating an arbitration pursuant to Rule
12302’’ or ‘‘no later than the answer due
date pursuant to Rule 12303, regardless
of the parties’ agreement to extend any
answer due date.’’ 20 Thus, parties
would know whether they will have to
gather and eventually produce the
documents on the Document Production
lead to the discovery of admissible evidence in
arbitrations’’ and that ‘‘[t]he Discovery Guide will
streamline the discovery process. By creating lists
of documents that should be produced in all
customer arbitrations . . . the Discovery Guide will
help expedite the discovery process and reduce the
number of discovery disputes between parties,
which in turn should help lower the cost of the
arbitration discovery process.’’). See also Securities
Exchange Act Release No. 70419 (September 16,
2013), 78 FR 57916, 57920 (September 20, 2013)
(Order Approving File No. SR–FINRA–2013–024)
(stating that FINRA amended the Discovery Guide
to ‘‘help reduce the number and limit the scope of
disputes involving document production.’’).
18 See infra Item II.B. (discussing Economic
Impact Assessment).
19 Nothing in the Discovery Guide precludes the
parties from voluntarily agreeing to an exchange of
documents in a manner different from that set forth
in the Discovery Guide. FINRA encourages the
parties to agree to the voluntary exchange of
documents and to stipulate to various matters. See
https://www.finra.org/sites/default/files/ArbMed/
p394527.pdf.
20 See supra note 13 and accompanying text.
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Lists in the early stages of an arbitration
case, either after the arbitration has been
initiated or no later than the answer due
date.21 As noted above, if the SEC
approves the proposed rule change,
FINRA will develop and publish
guidance about discovery that will be
available for all parties in simplified
customer arbitrations. This guidance
would include information to assist
customers in making an informed
decision regarding whether to elect to
use the Document Production Lists in
their case.
Finally, the proposed rule change
would give only customers the right to
elect to have the Document Production
Lists apply in paper cases and special
proceedings because, as discussed
above, a majority of the customers who
appear in these types of cases are pro se
and may not be familiar with the
discovery process.22 On the other hand,
few associated persons appear pro se in
paper cases and special proceedings.23
FINRA understands, however, that some
pro se associated persons may not be
familiar with the discovery process; the
guidance that FINRA plans to issue
would be available to all parties,
including parties who appear pro se.
Further, although only customers
would have the option to choose
whether the Document Production Lists
would apply in their case, FINRA does
not believe the proposed rule change
would impose an unfair burden on
industry parties or deprive them in any
way of their right to obtain discoverable
documents and information. If a
customer elects to have the Document
Production Lists apply in a paper case
or special proceeding, that election
would trigger production obligations for
both customers and industry parties; as
noted above, the documents on List 1
would be presumptively discoverable by
customers, and the documents on List 2
would be presumptively discoverable by
member firms and associated persons.24
Moreover, even if a customer chooses
not to apply the Document Production
Lists in a particular case, industry
parties still would have the same right
that they currently have under FINRA
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21 As
noted above, if the customer elects to have
the Document Production Lists apply, all parties
would be required to produce the documents on the
Document Production Lists, explain why the
documents cannot be produced, or object to the
production of the documents within the timeframes
set forth in FINRA Rule 12506.
22 See supra note 16 and accompanying text.
23 From 2018 to 2023, where they were a party,
associated persons appeared pro se in 88 of the 292
customer paper cases and special proceedings that
closed.
24 See FINRA Rule 12506. See also https://
www.finra.org/sites/default/files/ArbMed/
p394527.pdf.
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Rule 12800(g)(2) to request the
production of documents and
information from the customer.
B. Proposed Amendments To Clarify the
Applicability of the Document
Production Lists in Simplified Customer
Arbitrations When the Customer
Requests a Regular Hearing
Currently, FINRA Rule 12800(c)(3)(A)
states that, when a customer requests a
regular hearing, the ‘‘regular provisions’’
of the Customer Code relating to
prehearings and hearings apply. As
noted above, DRS has issued guidance
clarifying this language to mean that the
Document Production Lists apply in
simplified customer arbitrations in
which the customer requests a regular
hearing.25 For additional clarity, the
proposed rule change would codify that
the Document Production Lists apply to
simplified customer arbitrations in
which the customer requests a regular
hearing. Specifically, proposed Rule
12800(g)(1)(A) would provide that the
‘‘Document Production Lists, described
in Rule 12506, apply to arbitrations in
which the customer requests an Option
One hearing.’’ The proposed rule change
would increase transparency and help
ensure parties are aware and understand
that the Document Production Lists
apply in simplified customer
arbitrations in which the customer
requests a regular hearing.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date of the
proposed rule change in a Regulatory
Notice.26
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,27 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest.
FINRA believes that the proposed rule
change will protect investors and the
public interest as it will provide
customers in paper cases and special
proceedings with the option to use the
Document Production Lists, thereby
increasing customer awareness and
understanding of the discovery process
25 See
supra note 11 and accompanying text.
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.
27 15 U.S.C. 78o–3(b)(6).
26 FINRA
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and the likelihood that these parties are
able to discover the documents and
information that are relevant to their
arbitration. If the customer elects to use
the Document Production Lists in a
paper case or special proceeding, parties
should automatically (i.e., without the
need to make production requests or
engage in motion practice) receive those
documents and information that are
relevant, or likely to lead to relevant
evidence, in such customer disputes,
which could help expedite the
discovery process. In addition, this
increased access to relevant documents
and other information could improve
the efficiency of the DRS arbitration
forum to bring about outcomes (i.e.,
awards and settlements) in paper cases
or special proceedings that are more
consistent with the merits of the case.28
FINRA also believes that the proposed
rule change will protect investors and
the public interest by aligning the
Customer Code with existing DRS
practice and guidance that the
Document Production Lists apply in
simplified customer arbitrations in
which the customer requests a regular
hearing. Codifying this existing practice
and guidance will improve transparency
and enhance parties’ awareness and
understanding of the discovery process
in simplified customer arbitrations.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic
impact assessment to analyze the
regulatory need for the proposed rule
change, its potential economic impacts,
including anticipated costs, benefits,
and distributional and competitive
effects, relative to the current baseline,
and the alternatives FINRA considered
in assessing how best to meet FINRA’s
regulatory objectives.
(a) Regulatory Need
The proposed rule change addresses a
concern that certain customers in
simplified customer arbitrations may be
at a disadvantage in obtaining relevant
documents and other information useful
to their cases, due to a lack of awareness
and understanding of how to use the
discovery process. The proposed rule
change and additional guidance are
anticipated to increase customer
28 See infra Item II.B. (discussing Economic
Impact Assessment).
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awareness, understanding and
utilization of the discovery process,
reducing the risk that the resulting
outcomes do not reflect the actual
merits of the underlying dispute.
(b) Economic Baseline
The economic baseline for the
proposed rule change consists of the
current provisions under the Customer
Code and published guidance that
address the discovery process in
simplified customer arbitrations. FINRA
anticipates the proposed rule change to
affect the customers, industry parties,
and arbitrators to simplified customer
arbitrations.
To better understand the potential
impacts of the proposed rule change,
FINRA examines the 1,717 simplified
customer arbitrations that closed from
2018 to 2023.29 Simplified customer
arbitrations represent 12 percent of all
customer arbitrations which closed
during the sample period.
As discussed above, customer
representatives have provided feedback
that the Customer Code provides
inadequate guidance, particularly to pro
se customers, regarding discovery in
simplified customer arbitrations. They
have reported to FINRA that customers
may not know what documents to
request from the opposing party. This
raises concerns that parties are not
obtaining and, therefore, not providing
arbitrators the relevant documents and
information to decide simplified
customer arbitrations and that these
arbitrations are not decided on a full
record.
To put these concerns in context, for
the 1,717 simplified customer
arbitrations that closed from 2018 to
2023, FINRA identifies the number
where a customer appears pro se. A
higher percentage of customers appear
pro se in paper cases (517 of 792 cases,
65 percent) and special proceedings
(106 of 246 cases, 43 percent) than in
simplified customer arbitrations where
they request a regular hearing (183 of
679 cases, 27 percent).
Data are not available to
comprehensively describe the discovery
process in the DRS arbitration forum.
FINRA is therefore not able to determine
the number of discovery requests in
simplified customer arbitrations, the
frequency of objections, and how
discovery may differ by proceeding or
representation type.30
29 Customers appeared as claimant in 1,650
simplified customer arbitrations, as respondent in
63 simplified customer arbitrations, and as both
claimant and respondent in four cases.
30 Data are also not available describing, under
Rule 12800(g)(1), arbitrator discretion to choose
relevant portions of the Document Production Lists
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(c) Economic Impacts
In paper cases and special
proceedings, the proposed rule change
would provide customers the option to
apply the Document Production Lists.
Along with the planned additional
guidance, this proposed rule change
may increase customer awareness and
understanding of the discovery process
and their access to relevant documents
and other information through an
established framework of presumptively
discoverable documents. This increased
access may improve the efficiency of the
DRS arbitration forum to bring about
outcomes (i.e., awards and settlements)
in paper cases or special proceedings
that are more consistent with the merits
of the case which could decrease the
potential benefits to member firms and
associated persons from engaging in
misconduct and increase customer
protection.
Paper cases and special proceedings
may be decided on the merits of the case
where customers appear pro se and
avail themselves of discovery. The
proposed rule change, together with the
guidance that would accompany it,
would increase customers’ awareness
and understanding of their option to
apply the Document Production Lists,
and more generally inform them of the
documents or information that may be
available through discovery. The value
of the additional awareness and
understanding is likely greater for those
customers who appear pro se and have
limited knowledge of discovery than for
those customers who retain an attorney
or representation by a law clinic.
Customers who appear pro se, however,
may still have difficulty understanding
the discovery process, the types of
documents or information that may
support their claims, and whether to
apply the Document Production Lists.
For some customers who appear pro se,
therefore, the proposed rule change may
not have the full intended effect.
When customers elect to apply the
Document Production Lists in paper
cases or special proceedings, parties
may incur additional or fewer
discovery-related costs. The additional
costs customers may incur would be at
their own expense. The overall impact
on discovery-related costs would
depend on how the number of
production requests and discoveryrelated motions change relative to the
baseline. Parties may need to produce
additional documents or information
in paper cases and special proceedings to obtain
discovery. Arbitrator use of this discretion under
the baseline may indicate the need for information
by customers, and an impact of the proposed rule
change may be to reduce reliance on this discretion.
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described in the Document Production
Lists, increasing costs relative to the
baseline. On the other hand, parties may
cease objecting to the production of
documents that were requested in the
baseline and that become presumptively
discoverable. They may, however, incur
additional costs objecting to the
production of additional documents or
information that were not requested
under the baseline and which the
proposed rule change makes
presumptively discoverable.
The costs parties incur may also relate
to the time to resolution. The proposed
60 days for parties to respond to the
Document Production Lists may
lengthen the time to resolution.31 The
time to resolution may further lengthen
if parties object to the production of
documents or information that were not
requested under the baseline and which
the proposed rule change makes
presumptively discoverable. Longer
times to resolution may create
additional business uncertainty for
industry parties and delay the
availability of funds to customers who
win awards. To the extent that the
application of the Document Production
Lists reduces the amount of
disagreement between parties and
precludes the need for production
requests and discovery-related motions,
however, then the time to resolution
may decrease and parties may benefit
from a shorter time to resolution.
The greater exchange of relevant
documents or information when
customers elect to apply the Document
Production Lists may also increase the
ability of parties to settle prior to an
award. Relative to arbitrating the
dispute, parties who settle may incur
fewer costs (e.g., attorney fees, forum
fees, time to resolution) to resolve the
dispute.32
The codification of existing DRS
guidance (as detailed above) that the
Document Production Lists apply in
simplified customer arbitrations in
which the customer requests a regular
hearing should not result in material
economic effects. In the experience of
FINRA staff, since DRS issued
additional guidance, few questions have
arisen regarding the application of
31 As described above, under current FINRA Rule
12800(g)(2), when customers elect not to apply the
Document Production Lists, all production requests
must be served within 30 days from the date that
the last answer is due. Any response or objection
to a production request must be served within 10
days of its receipt.
32 Half of the 1,717 simplified customer
arbitrations that closed from 2018 to 2023 settled.
A higher percentage of simplified customer
arbitrations settled where customers requested a
regular hearing (73 percent) than in paper cases (34
percent) or special proceedings (56 percent).
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Federal Register / Vol. 89, No. 103 / Tuesday, May 28, 2024 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Document Production Lists in
simplified customer arbitrations in
which the customer requests a regular
hearing. However, to the extent that
parties are currently unaware of the DRS
guidance and misunderstand the
application of the Document Production
Lists in simplified customer
arbitrations, the codification of the DRS
guidance could affect the discovery
process.
(d) Alternatives Considered
An alternative to the proposed rule
change is to automatically apply the
Document Production Lists in paper
cases and special proceedings without
the need for the customer to make an
election. Relative to the proposed rule
change, all parties in paper cases and
special proceedings would obtain the
relevant documents and other
information and further decrease the
risk that arbitration outcomes do not
reflect the actual merits of the
underlying dispute. As discussed above,
most customers appear pro se in paper
cases and special proceedings and may
have difficulty understanding the
discovery process. Parties, however,
would incur the costs associated with
the application of the Document
Production Lists in all cases, even when
the documents and other information
described on the Document Production
Lists are not relevant to the case and
their production may not impact
arbitration outcomes.
Another alternative is to pare the
Document Production Lists for paper
cases and special proceedings, to the
extent possible, to those documents and
other information that are thought to be
more relevant for these arbitrations.
Relative to the proposed rule change,
this alternative may decrease
production costs. However, given that
the Document Production Lists were
designed to capture those documents
that are most likely to lead to the
discovery of relevant information in
customer arbitrations, paring down the
Document Production Lists may reduce
the ability of customers to access
relevant documents and other
information. It is not known how these
countervailing effects may impact the
decision of customers to apply the
Document Production Lists and case
outcomes.
Finally, an alternative to the proposed
rule change is to decrease the number of
days for a party to respond when
customers elect to apply the Document
Production Lists in paper cases and
special proceedings (e.g., from 60 days
to 30 days). This may reduce the extent
to which the time to resolution may
lengthen. Some parties, however,
VerDate Sep<11>2014
18:43 May 24, 2024
Jkt 262001
including customers who appear pro se,
may incur additional costs to respond to
the Document Production Lists within
the shortened timeframe, such as by
needing to obtain relevant documents
on an expedited basis. Parties may also
seek an extension, thereby lengthening
the discovery process, nonetheless.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–FINRA–2024–008 and should be
submitted on or before June 18, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–11584 Filed 5–24–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100193; File No. SR–
CboeBZX–2024–039]
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
FINRA–2024–008 on the subject line.
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–FINRA–2024–008. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
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 13,
2024, Cboe BZX Exchange, Inc.
(‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
PO 00000
Frm 00160
Fmt 4703
Sfmt 4703
May 21, 2024.
33 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 89, Number 103 (Tuesday, May 28, 2024)]
[Notices]
[Pages 46210-46214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11584]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100204; File No. SR-FINRA-2024-008]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 12800 (Simplified Arbitration) To Clarify and Amend the
Applicability of the Document Production Lists
May 21, 2024.
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 13, 2024, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the FINRA Code of Arbitration Procedure
for Customer Disputes (``Customer Code'') to clarify and, in some
instances, amend the applicability of the Document Production Lists to
simplified customer arbitrations administered under FINRA Rule 12800.
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
I. Overview of the Document Production Lists and Simplified Customer
Arbitrations
FINRA Dispute Resolution Services (``DRS'') provides a Discovery
Guide to supplement the discovery rules contained in the Customer Code
and help guide the parties and arbitrators through the discovery
process in customer arbitrations.\3\ The Document Production Lists,
which are included in the Discovery Guide and described in FINRA Rule
12506, outline presumptively discoverable documents that the parties
should exchange, without arbitrator or DRS staff intervention. Document
Production Lists 1 and 2 describe the documents that are presumed to be
discoverable in all arbitrations between a customer and a member firm
or associated person except in simplified customer arbitrations as
explained below.\4\ List 1 outlines the documents that member firms and
associated persons shall produce; List 2 outlines the documents that
customers shall produce.\5\
---------------------------------------------------------------------------
\3\ See https://www.finra.org/sites/default/files/ArbMed/p394527.pdf. The FINRA Discovery Guide and Document Production Lists
do not apply to arbitrations administered under the Code of
Arbitration Procedure for Industry Disputes.
\4\ See FINRA Rule 12506(a).
\5\ See https://www.finra.org/sites/default/files/ArbMed/p394527.pdf.
---------------------------------------------------------------------------
The proposed rule change would affect the applicability of the
Document Production Lists in simplified customer arbitrations.
Simplified customer arbitrations are arbitrations in which the dispute
between a customer and member firm or associated person involves
$50,000 or less, exclusive of interest and expenses.\6\ There are three
types of simplified customer arbitrations. If the customer does not
request a hearing, the arbitrator will render an award based on the
pleadings and other materials submitted by the parties (``paper
cases'').\7\ If the customer requests a hearing, the customer must
select between one of two hearing options.\8\ If the customer requests
an Option One hearing under FINRA Rule 12800(c)(3)(A), the regular
provisions of the Customer Code relating to prehearings and hearings,
including all fee provisions, apply (``regular hearing''). The customer
may also request an Option Two special proceeding, an abbreviated
hearing, under FINRA Rule 12800(c)(3)(B) (``special proceeding'').
---------------------------------------------------------------------------
\6\ See FINRA Rule 12800(a).
\7\ See FINRA Rule 12800(c)(2).
\8\ See FINRA Rule 12800(c)(3).
---------------------------------------------------------------------------
Currently, the Document Production Lists do not apply in paper
cases and special proceedings.\9\ However, under FINRA Rule
12800(g)(1), the arbitrator may exercise discretion to choose to use
relevant portions of the Document Production Lists in paper cases and
special proceedings ``in a manner consistent with the expedited nature
of simplified proceedings.'' Absent such an exercise of discretion by
the arbitrator, to obtain discovery in paper cases and special
proceedings, the parties must request documents and other information
from each other, pursuant to FINRA Rule 12800(g)(2).\10\ Therefore,
under the current Customer Code, no documents or information are
presumptively discoverable in paper cases and special proceedings.
---------------------------------------------------------------------------
\9\ FINRA Rule 12800(g)(1) provides that the Document Production
Lists ``do not apply to arbitrations subject to this rule'' (i.e.,
paper cases and special proceedings).
\10\ FINRA Rule 12800(g)(2) provides that all production
requests must be served on all other parties and filed with the
Director within 30 days from the date that the last answer is due;
any response or objection to a production request must be served on
all other parties and filed with the Director within 10 days of the
receipt of the request. The term ``Director'' means the Director of
DRS and, unless the Customer Code provides that the Director may not
delegate a specific function, the term includes FINRA staff to whom
the Director has delegated authority. See FINRA Rule 12100(m).
---------------------------------------------------------------------------
By contrast, the Document Production Lists do apply in simplified
customer arbitrations in which the customer requests a regular hearing.
As noted above, if the customer requests a regular hearing during the
simplified customer arbitration, FINRA Rule 12800(c)(3)(A) states that
the ``regular provisions'' of the Customer Code ``relating to
prehearings and hearings'' apply. DRS has issued guidance clarifying
this language to mean that the Document Production Lists apply in
simplified customer arbitrations in which the customer requests a
regular hearing.\11\ Consistent with this guidance, the
[[Page 46211]]
current practice is to treat the Document Production Lists as applying
in simplified customer arbitrations in which the customer requests a
regular hearing.\12\
---------------------------------------------------------------------------
\11\ See FINRA DRS Party's Reference Guide, p. 31, https://www.finra.org/sites/default/files/Partys-Reference-Guide.pdf
(explaining that ``[t]he Document Production Lists in the Discovery
Guide as described in FINRA Rule 12506 do not apply to simplified
[customer] arbitrations decided on the papers or decided by special
proceeding. However, the Discovery Guide does apply to simplified
cases in which a customer requests a regular hearing.''). See also
https://www.finra.org/arbitration-mediation/simplified-arbitrations.
\12\ For cases in which the Document Production Lists apply,
FINRA Rule 12506(b)(1) provides that unless the parties agree
otherwise, within 60 days of the date that the answer to the
statement of claim is due, or, for parties added by amendment or
third party claim, within 60 days of the date that their answer is
due, parties must either: (1) produce to all other parties all
documents in their possession or control that are described in
Document Production Lists 1 and 2; (2) identify and explain the
reason that specific documents described in Document Production
Lists 1 and 2 cannot be produced within the required time, and state
when the documents will be produced, and serve this response on all
parties and file this response with the Director; or (3) object as
provided in FINRA Rule 12508 and serve this response on all parties
and file this response with the Director.
---------------------------------------------------------------------------
II. The Proposed Rule Change
A. Proposed Amendments to the Applicability of the Document Production
Lists in Paper Cases and Special Proceedings
The proposed rule change would amend FINRA Rule 12800(g)(1) to give
customers in paper cases and special proceedings the option to elect at
the time that they initiate an arbitration or, if they are a
respondent, no later than the answer due date, whether they want the
Document Production Lists to apply to all parties. Specifically, under
proposed Rule 12800(g)(1)(B), FINRA Rule 12506--which describes the
Document Production Lists and sets forth the timeframes for responding
to the Document Production Lists--would not apply in paper cases or
special proceedings ``unless the customer requests that the Document
Production Lists apply to all parties when initiating an arbitration
pursuant to Rule 12302 or, if the customer is a respondent, no later
than the answer due date pursuant to Rule 12303, regardless of the
parties' agreement to extend any answer due date.'' \13\ If the
customer elects to apply the Document Production Lists in their case,
FINRA Rule 12506 would apply. As a result, all parties would be
required to produce the documents on the Document Production Lists,
explain why the documents cannot be produced, or object to the
production of the documents within the timeframes set forth in FINRA
Rule 12506.\14\
---------------------------------------------------------------------------
\13\ FINRA Rule 12303 provides that respondent(s) must serve
each other party with an answer to the statement of claim within 45
days of receipt of the statement of claim. FINRA Rule 12207(a)
provides that the parties may agree in writing to extend or modify
the deadline for serving an answer.
\14\ A party must act in good faith when complying with FINRA
Rule 12506(b)(1). ``Good faith'' means that a party must use its
best efforts to produce all documents required or agreed to be
produced. If a document cannot be produced in the required time, a
party must establish a reasonable timeframe to produce the document.
See FINRA Rule 12506(b)(2). If a party objects to producing any
document described in Document Production Lists 1 or 2, FINRA Rule
12508 provides that the party must specifically identify which
document or requested information it is objecting to and why (e.g.,
a document is irrelevant to the particular dispute).
---------------------------------------------------------------------------
If the customer does not timely elect to apply the Document
Production Lists to all parties when initiating an arbitration or, as
applicable, no later than the answer due date, proposed Rule
12800(g)(1)(B) would retain the current provision in the rule that the
arbitrator has the discretion to use relevant portions of the Document
Production Lists in a manner consistent with the expedited nature of
simplified customer arbitrations. Additionally, proposed Rule
12800(g)(2) would retain the current provision in the rule that would
permit the parties to request documents and information from each
other.
Based on feedback from customer representatives, FINRA is concerned
that pro se \15\ customers, who are the majority of customers in paper
cases and special proceedings,\16\ may not know what documents to
request from the opposing party. This lack of understanding creates the
risk that parties may not obtain and, therefore, are unable to provide
arbitrators with the relevant documents and information to decide paper
cases and special proceedings. Providing customers in paper cases and
special proceedings with the option to use the Document Production
Lists could increase customer awareness and understanding of the
discovery process and the likelihood that these parties are able to
discover the documents and information that are relevant to their
arbitration. If the customer elects to use the Document Production
Lists in a paper case or special proceeding, parties should
automatically (i.e., without the need to make production requests or
engage in motion practice) receive those documents and information that
are relevant, or likely to lead to relevant evidence, in such customer
disputes, which could help expedite the discovery process.\17\ In
addition, this increased access to relevant documents and other
information could improve the efficiency of the DRS arbitration forum
to bring about outcomes (i.e., awards and settlements) in paper cases
or special proceedings that are more consistent with the merits of the
case.\18\
---------------------------------------------------------------------------
\15\ For purposes of the Customer Code, the term ``pro se''
refers to a party that is not represented by an attorney or others
during an arbitration or mediation. See FINRA Rule 12100(z).
\16\ From 2018 to 2023, customers were a party in 1,038 paper
cases and special proceedings that closed and appeared pro se in 623
of the arbitrations (60 percent).
\17\ See Securities Exchange Act Release No. 41833 (September 2,
1999), 64 FR 49256, 49260-61 (September 10, 1999) (Order Approving
File No. SR-NASD-1999-07) (stating that the Document Production
Lists were created ``to provide parties with information that is
reasonably calculated to lead to the discovery of admissible
evidence in arbitrations'' and that ``[t]he Discovery Guide will
streamline the discovery process. By creating lists of documents
that should be produced in all customer arbitrations . . . the
Discovery Guide will help expedite the discovery process and reduce
the number of discovery disputes between parties, which in turn
should help lower the cost of the arbitration discovery process.'').
See also Securities Exchange Act Release No. 70419 (September 16,
2013), 78 FR 57916, 57920 (September 20, 2013) (Order Approving File
No. SR-FINRA-2013-024) (stating that FINRA amended the Discovery
Guide to ``help reduce the number and limit the scope of disputes
involving document production.'').
\18\ See infra Item II.B. (discussing Economic Impact
Assessment).
---------------------------------------------------------------------------
If the SEC approves the proposed rule change, FINRA will develop
and publish guidance about discovery that will be available to all
parties in simplified customer arbitrations. The guidance would, among
other things, direct parties to the Discovery Guide. In addition to
describing the Document Production Lists, the Discovery Guide includes
information that could improve the parties' awareness and understanding
of the discovery process such as information about the circumstances
under which the parties may object to the production of documents on
the Document Production Lists, the parties' ability to request
additional documents other than those included on the Document
Production Lists, the process for obtaining the production of documents
from non-parties, the forms that the production of documents should
take, and the parties' right to object to the production of documents
based on confidentiality and privilege concerns.\19\
---------------------------------------------------------------------------
\19\ Nothing in the Discovery Guide precludes the parties from
voluntarily agreeing to an exchange of documents in a manner
different from that set forth in the Discovery Guide. FINRA
encourages the parties to agree to the voluntary exchange of
documents and to stipulate to various matters. See https://www.finra.org/sites/default/files/ArbMed/p394527.pdf.
---------------------------------------------------------------------------
As discussed above, proposed Rule 12800(g)(1)(B) would require that
the customer decide whether to apply the Document Production Lists in a
paper case or special proceeding ``when initiating an arbitration
pursuant to Rule 12302'' or ``no later than the answer due date
pursuant to Rule 12303, regardless of the parties' agreement to extend
any answer due date.'' \20\ Thus, parties would know whether they will
have to gather and eventually produce the documents on the Document
Production
[[Page 46212]]
Lists in the early stages of an arbitration case, either after the
arbitration has been initiated or no later than the answer due
date.\21\ As noted above, if the SEC approves the proposed rule change,
FINRA will develop and publish guidance about discovery that will be
available for all parties in simplified customer arbitrations. This
guidance would include information to assist customers in making an
informed decision regarding whether to elect to use the Document
Production Lists in their case.
---------------------------------------------------------------------------
\20\ See supra note 13 and accompanying text.
\21\ As noted above, if the customer elects to have the Document
Production Lists apply, all parties would be required to produce the
documents on the Document Production Lists, explain why the
documents cannot be produced, or object to the production of the
documents within the timeframes set forth in FINRA Rule 12506.
---------------------------------------------------------------------------
Finally, the proposed rule change would give only customers the
right to elect to have the Document Production Lists apply in paper
cases and special proceedings because, as discussed above, a majority
of the customers who appear in these types of cases are pro se and may
not be familiar with the discovery process.\22\ On the other hand, few
associated persons appear pro se in paper cases and special
proceedings.\23\ FINRA understands, however, that some pro se
associated persons may not be familiar with the discovery process; the
guidance that FINRA plans to issue would be available to all parties,
including parties who appear pro se.
---------------------------------------------------------------------------
\22\ See supra note 16 and accompanying text.
\23\ From 2018 to 2023, where they were a party, associated
persons appeared pro se in 88 of the 292 customer paper cases and
special proceedings that closed.
---------------------------------------------------------------------------
Further, although only customers would have the option to choose
whether the Document Production Lists would apply in their case, FINRA
does not believe the proposed rule change would impose an unfair burden
on industry parties or deprive them in any way of their right to obtain
discoverable documents and information. If a customer elects to have
the Document Production Lists apply in a paper case or special
proceeding, that election would trigger production obligations for both
customers and industry parties; as noted above, the documents on List 1
would be presumptively discoverable by customers, and the documents on
List 2 would be presumptively discoverable by member firms and
associated persons.\24\ Moreover, even if a customer chooses not to
apply the Document Production Lists in a particular case, industry
parties still would have the same right that they currently have under
FINRA Rule 12800(g)(2) to request the production of documents and
information from the customer.
---------------------------------------------------------------------------
\24\ See FINRA Rule 12506. See also https://www.finra.org/sites/default/files/ArbMed/p394527.pdf.
---------------------------------------------------------------------------
B. Proposed Amendments To Clarify the Applicability of the Document
Production Lists in Simplified Customer Arbitrations When the Customer
Requests a Regular Hearing
Currently, FINRA Rule 12800(c)(3)(A) states that, when a customer
requests a regular hearing, the ``regular provisions'' of the Customer
Code relating to prehearings and hearings apply. As noted above, DRS
has issued guidance clarifying this language to mean that the Document
Production Lists apply in simplified customer arbitrations in which the
customer requests a regular hearing.\25\ For additional clarity, the
proposed rule change would codify that the Document Production Lists
apply to simplified customer arbitrations in which the customer
requests a regular hearing. Specifically, proposed Rule 12800(g)(1)(A)
would provide that the ``Document Production Lists, described in Rule
12506, apply to arbitrations in which the customer requests an Option
One hearing.'' The proposed rule change would increase transparency and
help ensure parties are aware and understand that the Document
Production Lists apply in simplified customer arbitrations in which the
customer requests a regular hearing.
---------------------------------------------------------------------------
\25\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice.\26\
---------------------------------------------------------------------------
\26\ 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.
---------------------------------------------------------------------------
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\27\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that the proposed rule change will protect investors
and the public interest as it will provide customers in paper cases and
special proceedings with the option to use the Document Production
Lists, thereby increasing customer awareness and understanding of the
discovery process and the likelihood that these parties are able to
discover the documents and information that are relevant to their
arbitration. If the customer elects to use the Document Production
Lists in a paper case or special proceeding, parties should
automatically (i.e., without the need to make production requests or
engage in motion practice) receive those documents and information that
are relevant, or likely to lead to relevant evidence, in such customer
disputes, which could help expedite the discovery process. In addition,
this increased access to relevant documents and other information could
improve the efficiency of the DRS arbitration forum to bring about
outcomes (i.e., awards and settlements) in paper cases or special
proceedings that are more consistent with the merits of the case.\28\
---------------------------------------------------------------------------
\28\ See infra Item II.B. (discussing Economic Impact
Assessment).
---------------------------------------------------------------------------
FINRA also believes that the proposed rule change will protect
investors and the public interest by aligning the Customer Code with
existing DRS practice and guidance that the Document Production Lists
apply in simplified customer arbitrations in which the customer
requests a regular hearing. Codifying this existing practice and
guidance will improve transparency and enhance parties' awareness and
understanding of the discovery process in simplified customer
arbitrations.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs, benefits, and distributional and
competitive effects, relative to the current baseline, and the
alternatives FINRA considered in assessing how best to meet FINRA's
regulatory objectives.
(a) Regulatory Need
The proposed rule change addresses a concern that certain customers
in simplified customer arbitrations may be at a disadvantage in
obtaining relevant documents and other information useful to their
cases, due to a lack of awareness and understanding of how to use the
discovery process. The proposed rule change and additional guidance are
anticipated to increase customer
[[Page 46213]]
awareness, understanding and utilization of the discovery process,
reducing the risk that the resulting outcomes do not reflect the actual
merits of the underlying dispute.
(b) Economic Baseline
The economic baseline for the proposed rule change consists of the
current provisions under the Customer Code and published guidance that
address the discovery process in simplified customer arbitrations.
FINRA anticipates the proposed rule change to affect the customers,
industry parties, and arbitrators to simplified customer arbitrations.
To better understand the potential impacts of the proposed rule
change, FINRA examines the 1,717 simplified customer arbitrations that
closed from 2018 to 2023.\29\ Simplified customer arbitrations
represent 12 percent of all customer arbitrations which closed during
the sample period.
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\29\ Customers appeared as claimant in 1,650 simplified customer
arbitrations, as respondent in 63 simplified customer arbitrations,
and as both claimant and respondent in four cases.
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As discussed above, customer representatives have provided feedback
that the Customer Code provides inadequate guidance, particularly to
pro se customers, regarding discovery in simplified customer
arbitrations. They have reported to FINRA that customers may not know
what documents to request from the opposing party. This raises concerns
that parties are not obtaining and, therefore, not providing
arbitrators the relevant documents and information to decide simplified
customer arbitrations and that these arbitrations are not decided on a
full record.
To put these concerns in context, for the 1,717 simplified customer
arbitrations that closed from 2018 to 2023, FINRA identifies the number
where a customer appears pro se. A higher percentage of customers
appear pro se in paper cases (517 of 792 cases, 65 percent) and special
proceedings (106 of 246 cases, 43 percent) than in simplified customer
arbitrations where they request a regular hearing (183 of 679 cases, 27
percent).
Data are not available to comprehensively describe the discovery
process in the DRS arbitration forum. FINRA is therefore not able to
determine the number of discovery requests in simplified customer
arbitrations, the frequency of objections, and how discovery may differ
by proceeding or representation type.\30\
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\30\ Data are also not available describing, under Rule
12800(g)(1), arbitrator discretion to choose relevant portions of
the Document Production Lists in paper cases and special proceedings
to obtain discovery. Arbitrator use of this discretion under the
baseline may indicate the need for information by customers, and an
impact of the proposed rule change may be to reduce reliance on this
discretion.
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(c) Economic Impacts
In paper cases and special proceedings, the proposed rule change
would provide customers the option to apply the Document Production
Lists. Along with the planned additional guidance, this proposed rule
change may increase customer awareness and understanding of the
discovery process and their access to relevant documents and other
information through an established framework of presumptively
discoverable documents. This increased access may improve the
efficiency of the DRS arbitration forum to bring about outcomes (i.e.,
awards and settlements) in paper cases or special proceedings that are
more consistent with the merits of the case which could decrease the
potential benefits to member firms and associated persons from engaging
in misconduct and increase customer protection.
Paper cases and special proceedings may be decided on the merits of
the case where customers appear pro se and avail themselves of
discovery. The proposed rule change, together with the guidance that
would accompany it, would increase customers' awareness and
understanding of their option to apply the Document Production Lists,
and more generally inform them of the documents or information that may
be available through discovery. The value of the additional awareness
and understanding is likely greater for those customers who appear pro
se and have limited knowledge of discovery than for those customers who
retain an attorney or representation by a law clinic. Customers who
appear pro se, however, may still have difficulty understanding the
discovery process, the types of documents or information that may
support their claims, and whether to apply the Document Production
Lists. For some customers who appear pro se, therefore, the proposed
rule change may not have the full intended effect.
When customers elect to apply the Document Production Lists in
paper cases or special proceedings, parties may incur additional or
fewer discovery-related costs. The additional costs customers may incur
would be at their own expense. The overall impact on discovery-related
costs would depend on how the number of production requests and
discovery-related motions change relative to the baseline. Parties may
need to produce additional documents or information described in the
Document Production Lists, increasing costs relative to the baseline.
On the other hand, parties may cease objecting to the production of
documents that were requested in the baseline and that become
presumptively discoverable. They may, however, incur additional costs
objecting to the production of additional documents or information that
were not requested under the baseline and which the proposed rule
change makes presumptively discoverable.
The costs parties incur may also relate to the time to resolution.
The proposed 60 days for parties to respond to the Document Production
Lists may lengthen the time to resolution.\31\ The time to resolution
may further lengthen if parties object to the production of documents
or information that were not requested under the baseline and which the
proposed rule change makes presumptively discoverable. Longer times to
resolution may create additional business uncertainty for industry
parties and delay the availability of funds to customers who win
awards. To the extent that the application of the Document Production
Lists reduces the amount of disagreement between parties and precludes
the need for production requests and discovery-related motions,
however, then the time to resolution may decrease and parties may
benefit from a shorter time to resolution.
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\31\ As described above, under current FINRA Rule 12800(g)(2),
when customers elect not to apply the Document Production Lists, all
production requests must be served within 30 days from the date that
the last answer is due. Any response or objection to a production
request must be served within 10 days of its receipt.
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The greater exchange of relevant documents or information when
customers elect to apply the Document Production Lists may also
increase the ability of parties to settle prior to an award. Relative
to arbitrating the dispute, parties who settle may incur fewer costs
(e.g., attorney fees, forum fees, time to resolution) to resolve the
dispute.\32\
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\32\ Half of the 1,717 simplified customer arbitrations that
closed from 2018 to 2023 settled. A higher percentage of simplified
customer arbitrations settled where customers requested a regular
hearing (73 percent) than in paper cases (34 percent) or special
proceedings (56 percent).
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The codification of existing DRS guidance (as detailed above) that
the Document Production Lists apply in simplified customer arbitrations
in which the customer requests a regular hearing should not result in
material economic effects. In the experience of FINRA staff, since DRS
issued additional guidance, few questions have arisen regarding the
application of
[[Page 46214]]
Document Production Lists in simplified customer arbitrations in which
the customer requests a regular hearing. However, to the extent that
parties are currently unaware of the DRS guidance and misunderstand the
application of the Document Production Lists in simplified customer
arbitrations, the codification of the DRS guidance could affect the
discovery process.
(d) Alternatives Considered
An alternative to the proposed rule change is to automatically
apply the Document Production Lists in paper cases and special
proceedings without the need for the customer to make an election.
Relative to the proposed rule change, all parties in paper cases and
special proceedings would obtain the relevant documents and other
information and further decrease the risk that arbitration outcomes do
not reflect the actual merits of the underlying dispute. As discussed
above, most customers appear pro se in paper cases and special
proceedings and may have difficulty understanding the discovery
process. Parties, however, would incur the costs associated with the
application of the Document Production Lists in all cases, even when
the documents and other information described on the Document
Production Lists are not relevant to the case and their production may
not impact arbitration outcomes.
Another alternative is to pare the Document Production Lists for
paper cases and special proceedings, to the extent possible, to those
documents and other information that are thought to be more relevant
for these arbitrations. Relative to the proposed rule change, this
alternative may decrease production costs. However, given that the
Document Production Lists were designed to capture those documents that
are most likely to lead to the discovery of relevant information in
customer arbitrations, paring down the Document Production Lists may
reduce the ability of customers to access relevant documents and other
information. It is not known how these countervailing effects may
impact the decision of customers to apply the Document Production Lists
and case outcomes.
Finally, an alternative to the proposed rule change is to decrease
the number of days for a party to respond when customers elect to apply
the Document Production Lists in paper cases and special proceedings
(e.g., from 60 days to 30 days). This may reduce the extent to which
the time to resolution may lengthen. Some parties, however, including
customers who appear pro se, may incur additional costs to respond to
the Document Production Lists within the shortened timeframe, such as
by needing to obtain relevant documents on an expedited basis. Parties
may also seek an extension, thereby lengthening the discovery process,
nonetheless.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2024-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2024-008. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to file number SR-FINRA-2024-008 and should be submitted on or
before June 18, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-11584 Filed 5-24-24; 8:45 am]
BILLING CODE 8011-01-P
