Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Notices 19155 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Exchange Act Release No. 62584 (July 28, 

2010), 75 FR 45685 (August 3, 2010). 

Separate Accounts after the 6% Contract 

Enhancement is applied. Accordingly, 

the asset-based charges applicable to the 

Separate Accounts will be assessed 

against the entire amounts held in the 

Separate Accounts, including any 6% 

Contract Enhancement amounts. As a 

result, the aggregate asset-based charges 

assessed will be higher than those that 

would be charged if the Contract 

owner’s contract value did not include 

any Contract Enhancement. 

6. Applicants submit that the 

provisions for recapture of any Contract 

Enhancement under the Contracts do 

not violate Sections 2(a)(32) and 

27(i)(2)(A) of the Act. Sections 26(e) and 

27(i) were added to the Act to 

implement the purposes of the National 

Securities Markets Improvement Act of 

1996 and Congressional intent. The 

application of a 6% Contract 

Enhancement to premium payments 

made under the Contracts should not 

raise any questions as to compliance by 

the Insurance Companies with the 

provisions of Section 27(i). However, to 

avoid any uncertainty as to full 

compliance with the Act, Applicants 

request an order granting an exemption 

from Sections 2(a)(32) and 27(i)(2)(A), to 

the extent deemed necessary, to permit 

the recapture of the 6% Contract 

Enhancement under the circumstances 

described in the Application, without 

the loss of relief from Section 27 

provided by Section 27(i). 

7. Applicants state that Section 22(c) 

of the Act authorizes the Commission to 

make rules and regulations applicable to 

registered investment companies and to 

principal underwriters of, and dealers 

in, the redeemable securities of any 

registered investment company to 

accomplish the same purposes as 

contemplated by Section 22(a). Rule 

22c–1 under the Act prohibits a 

registered investment company issuing 

any redeemable security, a person 

designated in such issuer’s prospectus 

as authorized to consummate 

transactions in any such security, and a 

principal underwriter of, or dealer in, 

such security, from selling, redeeming, 

or repurchasing any such security 

except at a price based on the current 

net asset value of such security which 

is next computed after receipt of a 

tender of such security for redemption 

or of an order to purchase or sell such 

security. 

8. Applicants state that it is possible 

that someone might view the Insurance 

Companies’ recapture of the 6% 

Contract Enhancement as resulting in 

the redemption of redeemable securities 

for a price other than one based on the 

current net asset value of the Separate 

Accounts. Applicants contend, 

however, that the recapture of the 6% 

Contract Enhancement does not violate 

Rule 22c–1. The recapture of some or all 

of the 6% Contract Enhancement does 

not involve either of the evils that 

Section 22(c) and Rule 22c–1 were 

intended to eliminate or reduce as far as 

reasonably practicable, namely: (i) The 

dilution of the value of outstanding 

redeemable securities of registered 

investment companies through their 

sale at a price below net asset value or 

repurchase at a price above it, and (ii) 

other unfair results, including 

speculative trading practices. To effect a 

recapture of a 6% Contract 

Enhancement, the Insurance Companies 

will redeem interests in a Contract 

owner’s contract value at a price 

determined on the basis of the current 

net asset value of the Separate 

Accounts. The amount recaptured will 

be less than or equal to the amount of 

the Contract Enhancement that the 

Insurance Companies paid out of their 

general account assets. Although 

Contract owners will be entitled to 

retain any investment gains attributable 

to the 6% Contract Enhancement and to 

bear any investment losses attributable 

to the 6% Contract Enhancement, the 

amount of such gains or losses will be 

determined on the basis of the current 

net asset values of the Separate 

Accounts. Thus, no dilution will occur 

upon the recapture of the Contract 

Enhancement. Applicants also submit 

that the second harm that Rule 22c–1 

was designed to address, namely, 

speculative trading practices calculated 

to take advantage of backward pricing, 

will not occur as a result of the 

recapture of the 6% Contract 

Enhancement. Because neither of the 

harms that Rule 22c–1 was meant to 

address is found in the recapture of the 

Contract Enhancement, Applicants 

assert that Rule 22c–1 should not apply 

to the 6% Contract Enhancement. 

However, to avoid any uncertainty as to 

full compliance with Rule 22c–1, 

Applicants request an order granting an 

exemption from the provisions of Rule 

22c–1 to the extent deemed necessary to 

permit them to recapture the Contract 

Enhancement under the Contracts. 

9. Applicants also submit that 

extending the requested relief to 

encompass Future Contracts and Other 

Accounts is appropriate in the public 

interest because it promotes 

competitiveness in the variable annuity 

market by eliminating the need to file 

redundant exemptive applications prior 

to introducing new variable annuity 

contracts. Applicants assert that 

investors would receive no benefit or 

additional protection by requiring 

Applicants to repeatedly seek exemptive 

relief that would present no issues 

under the Act not already addressed in 

the Application. 

10. Applicants submit, for the reasons 

stated herein, that their exemptive 

request meets the standards set out in 

Section 6(c) of the Act, namely, that the 

exemptions requested are appropriate in 

the public interest and consistent with 

the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act and that, 

therefore, the Commission should grant 

the requested order. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–8081 Filed 4–5–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64166; File No. SR–FINRA– 

2010–035] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 1 and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment No. 1, Relating to 

Amendments to the Discovery Guide 

and Rules 12506 and 12508 of the 

Code of Arbitration Procedure for 

Customer Disputes 

April 1, 2011. 

I. Introduction 

On July 12, 2010, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and 

Rule 19b–4 thereunder,2 a proposed rule 

change to amend the Discovery Guide, 

which includes Document Production 

Lists, and to make conforming changes 

to Rules 12506 and 12508 of the Code 

of Arbitration Procedure for Customer 

Disputes (‘‘Customer Code’’). The 

proposed rule change was published for 

comment in the Federal Register on 

August 3, 2010.3 The Commission 

received 55 comment letters on the 

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19156 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Notices 

4See comment letters submitted by Richard A. 

Stephens, Esq., dated August 6, 2010 (‘‘Stephens 

comment’’); Seth E. Lipner, Esq., Baruch College, 

Member, Deutsch & Lipner, dated August 15, 2010 

(‘‘Lipner comment’’); Leonard Steiner, Esq., dated 

August 16, 2010 (‘‘Steiner comment’’); Robert C. 

Port, Esq., Cohen Goldstein Port Gottlieb, LLP, 

dated August 19, 2010 (‘‘Port comment’’); Steven M. 

McCauley, Esq., dated August 19, 2010 (‘‘McCauley 

comment’’); Steven B. Caruso, Esq., Maddox Hargett 

& Caruso, P.C., dated August 20, 2010 (‘‘Caruso 

comment’’); Diane Nygaard, Esq., dated August 20, 

2010 (‘‘Nygaard comment’’); Ryan K. Bakhtiari, Esq., 

Aidikoff, Uhl and Bakhtiari, dated August 20, 2010 

(‘‘Bakhtiari comment’’); Thomas R. Cox, Esq., Miller, 

Canfield, Paddock and Stone, P.L.C., dated August 

20, 2010 (‘‘Cox comment’’); Steven J. Gard, Esq., 

dated August 22, 2010 (‘‘Gard comment’’); John W. 

Shaw, Esq., Berkowitz, Oliver, Williams, Shaw and 

Eisenbrandt, dated August 23, 2010 (‘‘Shaw 

comment’’); Stephen Krosschell, Esq., Goodman & 

Nekvasil, P.A., dated August 23, 2010 (‘‘Krosschell 

comment’’); David P. Neuman, Esq., Stoltmann Law 

Offices, P.C., dated August 23, 2010 (‘‘Neuman 

comment’’); Theodore A. Krebsbach, Esq., 

Krebsbach and Snyder, P.C., dated August 23, 2010 

(‘‘Krebsbach comment’’); Eric G. Wallis, Esq., Reed 

Smith LLP, dated August 23, 2010 (‘‘Wallis 

comment’’); Herb Pounds, Jr., Esq., dated August 23, 

2010 (‘‘Pounds comment’’); Alan S. Brodherson, 

Esq., dated August 24, 2010 (‘‘Brodherson 

comment’’); Joseph Terry, dated August 24, 2010 

(‘‘Terry comment’’); Mark James, dated August 24, 

2010 (‘‘James comment’’); Jonathan W. Evans, Esq., 

and Michael S. Edmiston, Esq., Law Offices of 

Jonathan W. Evans & Associates, dated August 24, 

2010 (‘‘Evans and Edmiston comment’’); G. Kirk 

Ellis, Esq., dated August 24, 2010 (‘‘Ellis comment’’); 

Jason R. Doss, Esq., The Doss Firm, LLC, dated 

August 24, 2010 (‘‘Doss comment’’); Jenice L. 

Malecki, Esq., Malecki Law, dated August 24, 2010 

(‘‘Malecki comment’’); Frances Ruby, dated August 

24, 2010 (‘‘Ruby comment’’); Carrie L. Chelko, Esq., 

Deputy General Counsel, Janney Montgomery Scott 

LLC, dated August 24, 2010 (‘‘Janney comment’’); 

Raymond W. Henney, Esq., Honigman Miller 

Schwartz and Cohn LLP, dated August 24, 2010 

(‘‘Henney comment’’); Jonathan Kord Lagemann, 

Esq., dated August 24, 2010 (‘‘Lagemann 

comment’’); Brian N. Smiley, Esq., Smiley Bishop & 

Porter, LLP, dated August 24, 2010 (‘‘Smiley 

comment’’); Stanley Yorsz, Esq., Buchanan Ingersoll 

& Rooney PC, dated August 24, 2010 (‘‘Yorsz 

comment’’); Dominick F. Evangelista, Esq., Bressler, 

Amery & Ross, P.C., dated August 24, 2010 

(‘‘Evangelista comment’’); Michael N. Ungar, Esq., 

Kenneth A. Bravo, Esq., Joseph S. Simms, Esq., and 

Jill Y. Coen, Esq., Ulmer & Berne LLP, dated August 

24, 2010 (‘‘Ulmer & Berne comment’’); Barry D. 

Estell, Esq., dated August 24, 2010 (‘‘Estell 

comment’’); Richard A. Lewins, Esq., dated August 

24, 2010 (‘‘Lewins comment’’); Robert M. Rudnicki, 

Esq., Vice President and Director of Litigation, 

Raymond James & Associates, Inc., on behalf of 

Raymond James Financial, Inc. and Raymond James 

& Associates, Inc., dated August 24, 2010 

(‘‘Raymond James comment’’); Lee H. Schillinger, 

dated August 24, 2010 (‘‘Schillinger comment’’); 

Paula D. Shaffner, Esq., Stradley Ronon Stevens & 

Young, LLP, dated August 24, 2010 (‘‘Shaffner 

comment’’); Kelly J. Moynihan, Esq., Keesal, Young 

& Logan, dated August 24, 2010 (‘‘Moynihan 

comment’’); Richard L. Martens, Esq., Jason S. 

Haselkorn, Esq., Patricia M. Christiansen, Esq., 

Charles L. Pickett, Esq., Casey Ciklin Lubitz 

Martens & O’Connell, dated August 24, 2010 

(‘‘Casey Ciklin comment’’); Peter J. Mougey, Esq., 

Levin Papantonio Thomas Mitchell Rafferty & 

Proctor, P.A., dated August 24, 2010 (‘‘Mougey 

comment’’); Rob Bleecher, Esq., dated August 24, 

2010 (‘‘Bleecher comment’’); Scott R. Shewan, Esq., 

President, Public Investors Arbitration Bar 

Association, dated August 24, 2010 (‘‘PIABA 

comment’’); Bradford D. Kaufman, Esq., Greenberg 

Traurig, P.A., dated August 24, 2010 (‘‘Kaufman 

comment’’); William A. Jacobson, Esq., Associate 

Clinical Professor, Cornell Law School, and 

Director, Cornell Securities Law Clinic, dated 

August 24, 2010 (‘‘Cornell Securities Law Clinic 

comment’’); S. Lawrence Polk, Esq., Sutherland 

Asbill & Brennan LLP, dated August 24, 2010 (‘‘Polk 

comment’’); John R. Cronin, Vermont Securities 

Director and Chair, NASAA Arbitration Project 

Group, dated August 25, 2010 (‘‘NASAA 

comment’’); Theodore M. Davis, Esq., dated August 

25, 2010 (‘‘Davis comment’’); Eliot Goldstein, Esq., 

Law Offices of Eliot Goldstein, LLP, dated August 

25, 2010 (‘‘Goldstein comment’’); Richard M. Layne, 

Esq., dated August 26, 2010 (‘‘Layne comment’’); 

Royal B. Lea, Esq., dated August 27, 2010 (‘‘Lea 

comment’’); Keith L. Griffin, Esq., Griffin Law Firm, 

LLC, dated August 27, 2010 (‘‘Griffin comment’’); 

Patricia Cowart, Esq., Chair, SIFMA Arbitration 

Committee, dated September 10, 2010 (‘‘SIFMA 

comment’’); Gail E. Boliver, Esq., Boliver & Bidwell, 

dated September 16, 2010 (‘‘Boliver comment’’); 

Scott C. Ilgenfritz, Esq., Johnson, Pope, Bokor, 

Ruppel & Burns, LLP, dated September 24, 2010 

(‘‘Ilgenfritz comment’’); Matthew Farley, Esq., 

Drinker Biddle & Reath LLP, dated September 24, 

2010 (‘‘Drinker Biddle comment’’); and Kathy A. 

Besmer, dated November 6, 2010 (‘‘Besmer 

comment’’). 

5See letter from Margo A. Hassan, Assistant Chief 

Counsel, FINRA Dispute Resolution, to Elizabeth 

Murphy, Secretary, Commission, dated February 8, 

2011 (‘‘Response Letter’’). The text of the proposed 

rule change and FINRA’s Response Letter are 

available on FINRA’s Web site at http:// 

www.finra.org, at the principal office of FINRA, on 

the Commission’s Web site at http://www.sec.gov, 

and at the Commission’s Public Reference Room. 

6See note 3 supra. 

7See Caruso, Bakhtiari, Cox, Pounds, Doss, 

Malecki, Smiley, Lewins, Raymond James, Mougey, 

PIABA, Cornell Securities Law Clinic, SIFMA, 

Boliver, and Ilgenfritz comments. 

8See Lipner, Steiner, Port, McCauley, Nygaard, 

Gard, Shaw, Neuman, Krebsbach, Krosschell, 

Brodherson, Terry, James, Evans and Edmiston, 

Ellis, Ruby, Janney, Lagemann, Yorsz, Evangelista, 

Ulmer & Berne, Estell, Schillinger, Shaffner, 

Moynihan, Casey Ciklin, Bleecher, Kaufman, 

NASAA, Davis, Goldstein, Layne, Lea, Griffin, 

Drinker Biddle, and Besmer comments. 

9See Stephens, Wallis, Henney, and Polk 

comments. 

10Response Letter. 

11 Id. 

12 Id. 

13See Lipner, Krebsbach, Evans and Edmiston, 

Shaffner, Bleecher, Griffin, Henney, NASAA, Yorsz, 

Goldstein, SIFMA, and Drinker Biddle comments. 

proposed rule change.4 On February 8, 2011, the Commission received from 

FINRA a Response to Comments and 

Partial Amendment No. 1 to the 

proposed rule change.5 The Commission 

is publishing this notice and order to 

solicit comment on Amendment No. 1 

and to approve the proposed rule 

change, as modified by Amendment No. 

1, on an accelerated basis. 

II. Description of Proposed Rule Change 

and Summary of Comments 

As described in Exchange Act Release 

No. 62584,6 FINRA is proposing to 

amend the Discovery Guide, which 

includes Document Production Lists, 

and to make conforming changes to 

Rules 12506 and 12508 of the Customer 

Code. Of the 55 comments received on 

the initial proposal, 15 supported it 

with modifications,7 36 opposed it,8 and 

4 addressed particular aspects of the 

proposal without expressing a position 

on whether the Commission should 

approve the proposed rule change.9

In its Response Letter, FINRA stated 

that the initial proposed rule change 

reflected several years of close 

consultation with FINRA’s constituents, 

including investor and industry 

representatives, arbitrators, and 

attorneys that handle investor claims at 

securities arbitration clinics. FINRA also 

stated that, because the Discovery 

Guide, as amended by the initial 

proposed rule change, was comprised of 

language that was discussed at length 

with these constituents and crafted to 

balance the parties’ discovery needs 

with the goal of keeping FINRA 

arbitration efficient and cost effective, 

FINRA was, for the most part, making 

only limited further revisions to the 

proposed rule change to provide 

additional clarification and guidance.10

In addition, FINRA stated that, if the 

Commission approves the proposed rule 

change as amended, it would establish 

a Discovery Task Force under the 

auspices of FINRA’s National 

Arbitration and Mediation Committee to 

review substantive issues relating to the 

Discovery Guide on an ongoing basis, 

for the purpose of keeping the Discovery 

Guide current as products change and 

new discovery issues arise.11 FINRA 

stated that it would convene the 

Discovery Task Force approximately six 

months after implementing the revised 

Discovery Guide to allow practitioners 

time to gauge the efficacy of the new 

Discovery Guide.12

FINRA’s responses to comments and 

changes to the proposed rule change 

made by Amendment No. 1 are 

described below. 

A. Guide Introduction 

1. Arbitrator Discretion 

Commenters expressed concerns that 

arbitrators may adhere strictly to the 

Discovery Guide’s two lists of 

documents (the first itemizing categories 

of documents to be produced by firms 

and their associated persons, and the 

second itemizing categories of 

documents to be produced by 

customers—together, ‘‘Lists’’) when 

making discovery decisions and may 

not use the flexibility the Discovery 

Guide provides to them.13 FINRA 

responded that it wants arbitrators to be 

aware of the flexibility they have when 

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14Response Letter. 

15 Id. 

16 Id. 

17 Id. 

18 Id. 

19 Id. 

20See note 3 supra. 

21See SIFMA and Drinker Biddle comments. The 

Drinker Biddle comment also asked FINRA to add 

‘‘prime-brokerage firm’’ to the parenthetical. FINRA 

believes that adding ‘‘clearing firm’’ to the 

parenthetical will add sufficient clarity for the 

Guide’s users and is not proposing to add ‘‘primebrokerage firm’’ at this time. 

22Response Letter. 

23 Id. 

24See PIABA and Caruso comments. 

25Response Letter. 

26See note 3 supra. 

27See Yorsz and Martens comments. 

28Response Letter. 

29See Krosschell, Pounds, Evans and Edmiston, 

Schillinger, PIABA, Polk, Layne, SIFMA, Drinker 

Biddle, and Janney comments. 

30See Estell comments. 

31 Id. 

32See Krebsbach, Lewins, PIABA, and Boliver 

comments. 

33Response Letter. 

34 Id. 

35 Id. 

36See Lipner, McCauley, Gard, Terry, Evans and 

Edmiston, and Bleecher comments. 

37Response Letter. 

38 Id. 

39See Lipner, McCauley, Neuman, Krebsbach, 

James, Evans and Edmiston, Doss, Ruby, Smiley, 

Estell, Mougey, Bleecher, NASAA, Davis, Layne, 

and Ilgenfritz comments. 

40See Cox, Krebsbach, Janney, Evangelista, Ulmer 

& Berne, SIFMA, and Drinker Biddle comments. 

41Response Letter. 

asked to decide discovery disputes, and 

therefore the initial proposal included 

revisions to the introduction of the 

Discovery Guide stating that arbitrators 

may order production of documents not 

appearing on the Lists, and that 

arbitrators can order that parties do not 

have to produce all items on the Lists 

in a particular case.14 Further, these 

revisions added guidance on how 

arbitrators should handle objections 

based on cost or burden of production.15

In addition to these changes, and in 

response to commenters’ concerns, 

FINRA has proposed changes to the 

introduction to explain that arbitrators 

must use their judgment in considering 

requests for documents beyond those 

contained in the Lists and may not deny 

document requests on the grounds that 

the documents are not expressly listed 

in the Discovery Guide.16 FINRA stated 

that, in addition to expanding the 

language in the Discovery Guide, if the 

SEC approves the proposed rule change, 

FINRA would revise the Arbitrator’s 

Reference Guide, which is posted on the 

FINRA Web site, to include a discussion 

on how arbitrators should use the new 

Discovery Guide.17 FINRA also stated 

that it would update its arbitrator 

training materials to ensure that FINRA 

makes arbitrators aware of the 

revisions.18 In addition, FINRA stated 

that it would offer training on the 

revised Discovery Guide in a workshop 

that FINRA would post as an audio file 

on its Web site if the proposed rule 

change, as amended, is approved.19

2. Business Models and Types of 

Customer Claims 

FINRA initially proposed adding 

language to the introduction of the 

Discovery Guide stating that parties and 

arbitrators should recognize that not all 

firms have the same business models 

and that certain items on the Lists may 

not be relevant in a particular case when 

the firm’s business model (e.g., full 

service firm, discount broker, or online 

broker) is taken into consideration.20

Commenters requested that FINRA add 

‘‘clearing firm’’ to the parenthetical 

listing examples of business models.21

FINRA agrees that adding ‘‘clearing 

firm’’ to the parenthetical would be 

helpful to parties and arbitrators and 

has amended the proposed language of 

the parenthetical accordingly.22 FINRA 

is also proposing in that same paragraph 

to replace the phrase ‘‘be relevant in’’ 

with the phrase ‘‘apply to’’ because 

‘‘apply to’’ would more precisely convey 

the intended meaning of the sentence.23

In addition, commenters asked for new 

language indicating that items on the 

Customer List may not apply in a 

particular case depending on the claims 

asserted.24 FINRA agrees that adding 

such guidance regarding customer 

claims would be helpful, and has 

amended the proposed rule change 

accordingly.25

In the initial proposed rule change, 

FINRA included language stating that 

electronic files are ‘‘documents’’ within 

the meaning of the Discovery Guide.26

Commenters suggested that FINRA 

should include additional guidance 

concerning electronic files.27 FINRA 

responded that it understands that 

issues relating to electronic discovery 

are becoming more prevalent and 

intends to recommend that the 

Discovery Task Force include the topic 

on its agenda.28 However, FINRA is not 

proposing any additional revisions 

concerning electronic discovery at this 

time. 

3. Privilege 

Several commenters raised concerns 

that List items might require production 

of privileged documents.29 One 

commenter suggested that parties raise 

objections based on unspecified or 

unrecognized privileges.30 Based on 

these comments, FINRA believes that 

additional guidance on acceptable 

grounds for assertions of privilege 

would be helpful to parties and 

arbitrators, and is proposing to add 

language to the introduction stating that 

parties are not required to produce 

documents that are otherwise subject to 

an established privilege, including the 

attorney-client privilege and attorney 

work product doctrine.31

4. Enforcing Document Production 

Commenters raised concerns about 

arbitrators not adequately enforcing the 

discovery rules, including through 

reluctance to impose sanctions for party 

failure to comply with discovery 

rules.32 FINRA believes that the 

appropriate places to address the 

arbitrators’ duty to enforce discovery 

requirements are the Code of Arbitration 

Procedure and FINRA’s training 

materials.33 FINRA stated that it trains 

arbitrators concerning the discovery 

rules and available sanctions.34 FINRA 

also stated that, to reinforce the training, 

it had included a discussion in the 

revised Arbitrator’s Reference Guide 

(which FINRA indicated would be 

posted to FINRA’s Web site in the near 

future) that addresses discovery 

obligations and discusses sanctions.35

B. Document Production Lists 

1. Eliminating the Discovery Guide 

Several commenters asserted that 

FINRA should eliminate the Discovery 

Guide.36 FINRA disagreed with the 

commenters and stated that experience 

with the current Discovery Guide since 

its inauguration in 1999 indicates that 

the Discovery Guide and its Lists help 

parties obtain the documents they need 

to develop a case.37 FINRA believes that 

the proposed rule change, which 

incorporated user feedback after years of 

experience with the Discovery Guide, 

will improve the discovery process for 

customers, and for firms and their 

associated persons.38

2. Production Burden 

Several commenters expressed the 

view that document production under 

the Guide is burdensome to investors.39

Others raised concerns about the 

burdens imposed on firms and their 

associated persons.40 FINRA stated that 

it created the Discovery Guide to 

facilitate the exchange of the kinds of 

documents that parties routinely sought 

during discovery and that arbitrators 

regularly ordered produced. FINRA also 

stated that the proposed revisions reflect 

experience gained over the years since 

FINRA implemented the Discovery 

Guide.41 In addition, FINRA stated that 

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42 Id. 43See Port, Cox, Shaw, Krebsbach, Brodherson, 

Janney, Yorsz, Shaffner, Martens, Ulmer & Berne, 

and SIFMA comments. 

44FINRA stated that it proposed to update the 

Discovery Guide in 2008, and, although the 2008 

proposal was withdrawn, FINRA incorporated 

many suggestions made in comments on that 

proposal, including the suggestion that FINRA 

consolidate the lists, in the current proposal. See 

Response Letter. 

45Response Letter. 

46 Id. 

47See Stephens, Caruso, Krosschell, Pounds, 

Evans and Edmiston, Smiley, Ulmer & Berne, Estell, 

Raymond James, Shillinger, Shafner, Mougey, 

PIABA, Cornell Securities Law Clinic, Davis, 

Goldstein, Layne, SIFMA, Boliver, and Drinker 

Biddle comments. Commenters asserted, among 

other objections, that time periods were too short, 

or too long, or were not consistent between 

customers and firms/associated persons. 

48Response Letter. 

49 Id. 

50 Id. 

51See Lipner, Bakhtiari, Malecki, Mougey, and 

Goldstein comments. 

52See Krebsbach comments. 

53Response Letter. 

54See SIFMA and Raymond James comments. 

55Response Letter. 

56 Id. 

57See List 1, items 2, 7, 9, 11, 12, 13, and 17. 

58Response Letter. 

59See note 3 supra. 

60Response Letter. 

balancing the desire to provide parties 

with the documents they need to 

prepare their cases with a desire to 

minimize production burdens is 

challenging, but, based on years of 

experience with the Discovery Guide 

and constituent feedback, FINRA 

believed that the proposed rule change, 

as amended, would strike an 

appropriate balance.42

3. Two List Format 

Several commenters objected to 

FINRA’s proposal to consolidate the 

Lists from 14 claim-specific lists to two 

general Lists (one for firms and their 

associated persons, and one for 

customers) citing, among other 

objections, additional production 

burdens and the potential for producing 

documents that are not needed in every 

case.43 FINRA stated that it proposed 

the consolidation in response to 

suggestions from advocates for 

customers that FINRA eliminate the 

Lists for specific types of claims because 

customers are not required to plead 

causes of action under the Customer 

Code.44 FINRA also stated that, along 

with consolidating the Lists, FINRA 

proposed expanding the guidance it 

gives to arbitrators in the Discovery 

Guide’s introduction on how to handle 

discovery issues so that arbitrators 

understand that they may tailor the 

Discovery Guide to unique 

circumstances that arise in arbitration 

cases.45 FINRA stated that the 

consolidation would better serve forum 

users and ultimately reduce the number 

and limit the scope of disputes 

involving document production.46

4. Time Periods and Scope of 

Production 

Several commenters objected to the 

time periods specified in the proposed 

consolidated List items.47 FINRA 

responded by stating that investor and 

industry representatives that 

collaborated with FINRA on the 

proposed rule change considered each 

List item on its own merits and 

discussed, over several meetings, the 

time periods for each item.48 FINRA 

explained that, given the effort that 

went into determining appropriate time 

periods for production, FINRA was not 

proposing to change any of the time 

periods in the proposed rule change.49

FINRA also stated that the Discovery 

Task Force may choose to revisit the 

time periods for production of certain 

documents after forum users have 

gained experience with the revised 

Discovery Guide.50

5. Product Cases 

Several commenters raised concerns 

that the Guide does not sufficiently 

address claims alleging the defective 

structuring or widespread mismarketing 

of a specific security, or ‘‘product 

cases.’’ 51 One commenter expressed the 

belief that the Guide should not address 

specific products.52 FINRA responded 

by stating that it believes product cases 

are an appropriate subject for the 

Discovery Task Force, and that it 

intends to suggest that the Task Force 

consider the topic further.53

6. Distinguishing Customer Parties From 

Other Customers 

Commenters asked FINRA to revise 

the proposed List items to distinguish 

between customers that are parties to a 

case and other, non-party customers.54

FINRA agreed that making such a 

distinction in the proposed List items 

would add clarity to the Discovery 

Guide.55 FINRA has accordingly 

amended the proposed preamble to the 

Lists to state that, throughout the Lists, 

FINRA will refer to customers that are 

parties to an arbitration case as 

‘‘customer parties’’ and other, non-party 

customers as ‘‘customers.’’ 56

7. Accounts or Transactions at Issue 

Several proposed List items called for 

a firm or associated person to produce 

documents relating to the accounts or 

transactions at issue.57 Upon further 

consideration, FINRA has amended the 

proposed rule change by specifying that, 

in addition to documents relating to the 

accounts or transactions at issue, these 

items cover documents relating to the 

claims, and products or types of 

products, at issue.58

C. Individual List Items 

In addition to the amendments 

described above, FINRA has made a 

number of revisions to the proposed 

rule change that are specific to 

individual items on the Lists. 

1. List 1, Item 2 

As initially proposed, this item would 

have called for production of all 

correspondence sent to customers or 

received by firms and their associated 

persons specifically relating to the 

accounts or transactions at issue 

including, but not limited to, documents 

relating to asset allocation, 

diversification, trading strategies, and 

market conditions; and all advertising 

materials sent to customers of the firm 

that refer to the securities or account 

types at issue.59 Unless separately 

requested, the documents would not 

have included confirmation slips and 

monthly statements. 

FINRA has made several changes to 

this proposed item that FINRA believes 

would clarify the item’s application and 

provide additional guidance to parties 

and arbitrators.60 As amended, the item 

would require production of all 

correspondence sent to the customer 

parties or received by the firm or its 

associated persons that relate to the 

claims, accounts, transactions, or 

products or types of products at issue 

including, but not limited to, documents 

relating to asset allocation, 

diversification, trading strategies, and 

market conditions; and all advertising 

materials sent to customers of the firm 

that refer to the products or account 

types that are at issue or that were used 

by the firm or its associated persons to 

solicit or provide services to the 

customer parties. In addition, if 

requested, the documents would 

include confirmation slips and monthly 

statements. Even if not requested, the 

documents would include confirmation 

slips and monthly statements that have 

handwritten notations or that are not 

identical to those the firm sent to the 

customer parties. 

2. List 1, Item 4 

Currently, for claims alleging 

unauthorized trading, the Discovery 

Guide presumes that firms will produce 

order tickets for the customers’ 

transactions at issue. FINRA initially 

proposed to delete this requirement on 

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Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Notices 19159 

61See Stephens, Caruso, Nygaard, Krosschell, 

Evans and Edmiston, Schillinger, Layne, and 

Pounds comments. 

62Response Letter. 

63 Id. 

64See note 3 supra. 

65See Response Letter. Cf. Estell comments 

(relating to news articles or outside research). 

66See note 3 supra. 

67Response Letter. 

68See note 3 supra. 

69Response Letter. 

70See note 3 supra. 

71Response Letter. Cf. Estell comments (relating 

to the term ‘‘focused on’’). 

72See note 3 supra. 

73Response Letter. 

74See note 3 supra. 

75 Id. 

76Response Letter. 

77 Id. 

78See note 3 supra. 

79Response Letter. In its comment, PIABA 

questioned whether there was an error in the rule 

text of List 2, Item 8(b) because it did not limit 

production to claims alleging unauthorized trading. 

80Response Letter. 

81 Id. 

82See note 3 supra. 

the grounds that production of order 

tickets is burdensome, and evidence 

relating to whether the claimants 

authorized a particular transaction 

would be produced under proposed List 

1, Items 4, 6, and 8. Several commenters 

objected to the proposed deletion and 

stated, among other things, that order 

tickets provide evidence of whether a 

trade was solicited or unsolicited, 

evidence of whether a trade was 

reviewed and approved by supervisory 

personnel, and evidence of the time that 

an order was entered.61 FINRA found 

the comments persuasive, and has 

amended the proposed item to restore 

the presumption that firms will produce 

order tickets for the customer parties’ 

transactions at issue in cases alleging 

unauthorized trading.62 FINRA believes 

that the arbitrators can effectively 

address issues of production burden on 

a case-by-case basis.63

3. List 1, Item 5(a) 

As initially proposed, this item would 

have provided for production of all 

materials that the firm or its associated 

persons prepared, used or provided to 

customers relating to the transactions or 

products at issue, including research 

reports, sales materials, performance or 

risk data, prospectuses, and other 

offering documents, including 

documents intended or identified as 

being ‘‘for internal use only.’’ 64 In 

response to comments, FINRA is 

proposing to amend the proposed item 

to clarify its intended scope by 

specifying that the documents include 

copies of news articles or outside 

research.65

4. List 1, Item 6 

As initially proposed, this item would 

have required production of all notes 

the firm or its associated persons made, 

including, but not limited to, entries in 

any diary or calendar, relating to the 

customers or the customers’ accounts or 

transactions at issue.66 For clarity, 

FINRA has amended this proposed item 

to require production of all notes the 

firm or its associated persons made 

relating to the customer parties or the 

customer parties’ claims, accounts, 

transactions, or products or types of 

products at issue, including, but not 

limited to, entries in any diary or 

calendar, relating to the claims or 

products at issue.67

5. List 1, Item 7(a) 

As initially proposed, this item would 

have required production of all notes or 

memoranda evidencing supervisory, 

compliance, or managerial review of the 

customers’ accounts or trades therein for 

the period at issue.68 FINRA has 

amended this proposed item to expand 

the guidance provided to parties and 

arbitrators by requiring production of all 

notes or memoranda evidencing 

supervisory, compliance, or managerial 

review of the customer parties’ accounts 

or transactions therein or of the 

associated persons assigned to the 

customer parties’ accounts for the 

period at issue.69

6. List 1, Item 14 

As initially proposed, this item would 

have required production of portions of 

internal audit reports for the branch in 

which the customers maintained 

accounts that ‘‘focused on’’ associated 

persons or the accounts or transactions 

at issue.70 FINRA has amended this item 

to clarify its intended scope by 

replacing ‘‘focused on’’ with 

‘‘concern.’’ 71

7. List 1, Item 15 

As initially proposed, this item would 

have required production of records of 

disciplinary action taken against a firm’s 

associated persons by any regulator or 

employer for all sales practice violations 

or conduct similar to the conduct 

alleged in the Statement of Claim.72

FINRA has amended this proposed item 

to clarify its intended scope by 

including the same parenthetical 

reference to ‘‘state, federal or selfregulatory organization’’ that FINRA 

uses in other items in the Discovery 

Guide that refer to regulators.73

8. List 2, Item 1 

As initially proposed, this item 

(relating to customer tax documents) 

would have stated that customers may 

redact information relating to medical 

and dental expenses and the names of 

charities on Schedule A of their tax 

return unless the information is related 

to the allegations in the Statement of 

Claim.74 The proposed statement was 

followed by language indicating that 

income tax returns must be identical to 

those that were filed with the Internal 

Revenue Service.75 To add clarity to the 

proposed item, FINRA has amended it 

by moving the sentence indicating that 

tax returns must be identical so that it 

appears immediately above the 

statement permitting redaction of the 

returns.76

9. List 2, Item 4 

This item concerns the customers’ 

accounts at firms that are not parties to 

the matter. For clarity, FINRA has 

amended the proposed item by 

distinguishing between non-party firms 

and party firms.77

10. List 2, Item 8 

This item relates to telephone records. 

In the initial proposed rule change, 

FINRA stated that it was not proposing 

any substantive changes to the 

Discovery Guide’s application to 

telephone records.78 In response to 

comments regarding that statement, 

FINRA offered a clarification.79 FINRA 

states that, under the current Discovery 

Guide, customers are required to 

produce certain documents relating to 

telephone records only if they are 

alleging unauthorized trading.80 In 

contrast, proposed item 8 would require 

customers to produce the specified 

documents in every case, which is more 

than a ministerial change.81

11. List 2, Item 17 

As initially proposed, this item would 

have required production of documents 

showing the customers’ complete 

educational and employment 

background or, in the alternative, a 

description of the customers’ 

educational and employment 

background if not set forth in resumes 

produced under item 16.82 FINRA has 

amended this proposed item by revising 

it to require production of any existing 

description of the customer parties’ 

educational and employment 

background if not set forth in resumes 

produced under item 16. 

12. List 2, Item 19 

This item concerns insurance 

products that provide a death benefit. 

As initially proposed, it would have 

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19160 Federal Register / Vol. 76, No. 66 / Wednesday, April 6, 2011 / Notices 

83See note 3 supra. 

84Response Letter. 

85 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

86 15 U.S.C. 78o–3(b)(6). 

87Cf. Response Letter (describing plans for further 

consideration of issues by the Discovery Task 

Force). 

88 15 U.S.C. 78s(b)(2). 

89 15 U.S.C. 78s(b)(2). 

90 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

required customers to produce all 

insurance information received from an 

insurance sales agent or securities 

broker relating to such insurance.83

FINRA has amended the proposed item 

to clarify its intended scope by deleting 

the reference to ‘‘insurance’’ before 

‘‘information.’’ 84

III. Commission’s Findings 

After careful review of the proposed 

rule change, the comment letters and 

the FINRA Response Letter, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities association.85 In 

particular, the Commission finds that 

the proposed rule change is consistent 

with Section 15A(b)(6) of the Act,86

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 believes that the 

revisions to the Discovery Guide will 

help reduce the number and limit the 

scope of disputes involving document 

production and other matters, thereby 

improving the arbitration process for the 

benefit of the public investors, brokerdealer firms, and associated persons 

who use the process. The revisions to 

the Discovery Guide are the result of 

over six years of consultation by FINRA 

with its constituents. The Commission 

also expects that further improvement of 

the process should be possible through 

the Discovery Task Force’s 

consideration of discovery issues as 

they arise.87

IV. Accelerated Approval 

The Commission finds goods cause, 

pursuant to Section 19(b)(2) of the 

Exchange Act,88 for approving the 

proposed rule change, as modified by 

Amendment No. 1 thereto, prior to the 

30th day after publication of notice of 

the filing of Amendment No. 1 in the 

Federal Register. The proposed rule 

change was informed by FINRA’s 

consideration of, and the incorporation 

of many suggestions made in, extensive 

comments on a 2008 proposal to update 

the Discovery Guide, and Amendment 

No. 1’s modifications to the proposed 

rule change add clarity to the Discovery 

Guide and provide additional guidance 

to parties and arbitrators. 

Accordingly, the Commission finds 

that good cause exists to approve the 

proposal, as modified by Amendment 

No. 1, on an accelerated basis. 

V. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as modified by Amendment No. 

1, is consistent with the Act. Comments 

may be submitted by any of the 

following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2010–035 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2010–035. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2010–035 and 

should be submitted on or before April 

27, 2011. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,89 that the 

proposed rule change (SR–FINRA– 

2010–035), as modified by Amendment 

No. 1, be, and hereby is, approved on an 

accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.90

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–8200 Filed 4–5–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64163; File No. SR– 

NYSEAmex–2011–22] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by NYSE 

Amex LLC To Expand the $2.50 Strike 

Price Program 

March 31, 2011. 

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 March 

29, 2011, NYSE Amex LLC (‘‘NYSE 

Amex’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Commentary .07 to NYSE Amex Rule 

903 to expand the $2.50 Strike Price 

Program. The text of the proposed rule 

change is available at the principal 

office of Exchange, the Commission’s 

Public Reference Room, on the 

Commission’s Web site at http:// 

www.sec.gov, and http://www.nyse.com. 

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