Document ID: SEC-2013-1101-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-06-20T04:00Z

[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Notices]
[Pages 37261-37265]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14683]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69761; File No. SR-FINRA-2013-024]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Discovery Guide Used in Customer Arbitration 
Proceedings

June 13, 2013.
    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 June 3, 2013, 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 substantially prepared by 
FINRA. The Commission is publishing this notice to

[[Page 37262]]

solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Discovery Guide (``Guide'') used in 
customer arbitration proceedings to provide general guidance on 
electronic discovery (``e-discovery'') issues and product cases and to 
clarify the existing provision relating to affirmations made when a 
party does not produce documents specified in the Guide. The proposed 
rule change fulfills FINRA's commitment to review the topics of e-
discovery and product cases with the Discovery Task Force (``Task 
Force'') that FINRA established in 2011.\3\ FINRA believes that the 
proposed revisions to the Guide will reduce the number and limit the 
scope of disputes involving document production in customer cases, 
thereby improving the arbitration process for the benefit of public 
investors, broker-dealer firms, and associated persons.
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    \3\ In 2011, FINRA received SEC approval to update the Guide 
(See Securities Exchange Act Rel. No. 64166 (April 1, 2011), 76 
Federal Register 19155 (April 6, 2011), File No. SR-FINRA-2010-035). 
As part of the rule making process, FINRA agreed to establish the 
Task Force under the auspices of the National Arbitration and 
Mediation Committee (NAMC). FINRA charged the Task Force with 
reviewing substantive issues relating to the Guide on a periodic 
basis to keep the Guide current as products change and new discovery 
issues arise. FINRA pledged to ask the Task Force to review e-
discovery issues and product cases.
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    The text of the proposed rule change is available on FINRA's Web 
site at http://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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    The Guide supplements the discovery rules contained in the FINRA 
Code of Arbitration Procedure for Customer Disputes (``Customer 
Code''). It includes an introduction which describes the discovery 
process generally, and explains how arbitrators should apply the Guide 
in arbitration proceedings. The introduction is followed by two 
Document Production Lists (Lists), one for firms/associated persons, 
and one for customers, which enumerate the documents that parties 
should exchange without arbitrator or staff intervention. The Guide 
only applies to customer arbitration proceedings, not to intra-industry 
cases.
    As stated above, in 2011 FINRA updated the Guide and established 
the Task Force. To fulfill the commitment FINRA made to the SEC during 
the rulemaking process, the first topics that the Task Force discussed 
were e-discovery and product cases. The Task Force also reviewed 
concerns raised by forum users about the affirmation language in the 
Guide's introduction.
E-Discovery
    FINRA considers electronic files to be documents within the meaning 
of the Guide. As part of the 2011 revisions, FINRA updated the Guide to 
expressly state that electronic files are documents within the meaning 
of the Guide and that arbitrators decide any disputes that arise about 
the form in which a party produces a document. Commenters on the 
proposed rule change asked FINRA for additional guidance on e-
discovery. The Task Force discussed e-discovery over numerous meetings 
and recommended that FINRA amend the Guide to include general 
guidelines for arbitrators to consider when deciding disputes relating 
to the form of production for electronic documents.
    FINRA is proposing to amend the Guide's introduction to state that 
parties are encouraged to discuss the form in which they intend to 
produce documents and, whenever possible, to agree to the form of 
production. The provision would require parties to produce electronic 
files in a ``reasonably usable format.'' The term reasonably usable 
format would refer, generally, to the format in which a party 
ordinarily maintains a document, or to a converted format that does not 
make it more difficult or burdensome for the requesting party to use 
during a proceeding.
    The proposed guidance would also state that when arbitrators are 
resolving contested motions about the form of document production, they 
should consider the totality of the circumstances, including:
     For documents in a party's possession or custody, whether 
the chosen form of production is different from the form in which a 
document is ordinarily maintained;
     For documents that must be obtained from a third party 
(because they are not in a party's possession or custody), whether the 
chosen form of production is different from the form in which the third 
party provided it; and
     For documents converted from their original format, a 
party's reasons for choosing a particular form of production; how the 
documents may have been affected by the conversion to a new format; and 
whether the requesting party's ability to use the documents is 
diminished by any change in the documents' appearance, searchability, 
metadata, or maneuverability.
    The third factor would advise arbitrators to consider, among other 
things, whether a party's ability to use a converted document is 
diminished by a change in the documents' appearance, searchability, 
metadata, or maneuverability. If the SEC approves the proposed rule 
change, FINRA intends to provide arbitrators with guidance on the terms 
``appearance,'' ``searchability,'' ``metadata,'' and 
``maneuverability'' in training materials to be posted on FINRA's Web 
site. FINRA would include the substance of the following descriptions 
of each term in the training materials:
     Appearance--In many instances, converting a document from 
its ``native format'' (the form in which the electronic file was 
created) to a hard copy or static format will not affect the appearance 
of the document. However, that is not always the case. If, for example, 
a party prints a Microsoft Word[supreg] document (``Word document'') 
and produces it in hard copy, it will look the same. However, a party 
might configure some native files to print only certain portions of the 
document. For example, a party could set the print area on a Microsoft 
Excel[supreg] spreadsheet (``Excel spreadsheet'') to print only certain 
rows or columns. A hard copy print-out of such an Excel spreadsheet 
would contain less information than the native file. Similarly, a hard 
copy print-out of a Microsoft PowerPoint[supreg] presentation may not 
contain speaker's notes that appear in the electronic file.

[[Page 37263]]

     Searchability--Converting a native file may affect the 
searchability of the document. If a party prints a Word document and 
produces it in hard copy form, the document is not electronically 
searchable. In its native form, the contents of a Word document can be 
searched electronically for key words or information. Static electronic 
formats may or may not be searchable, depending on how they are 
converted.
     Metadata--Converting a native file may also affect the 
availability of metadata. Metadata describes how, when, and by whom 
electronically stored information (``ESI'') was collected, created, 
accessed, or modified, and how it is formatted. For example, an email 
contains many pieces of metadata, such as the date and time it was 
sent, and information about who sent it, and who received it. It is 
possible to convert a native file to a static format and keep all the 
metadata attached. It is also possible to produce some, but not all, 
metadata associated with a native file.
     Maneuverability--Converting a native file into another 
format may affect the maneuverability of a document--the party's 
ability to manipulate data using the native application. For example, 
an Excel spreadsheet in its native format can be sorted and filtered 
for data and the user can examine embedded formulas and references. If 
the Excel spreadsheet is printed or converted to certain formats, that 
ability is lost.
    FINRA recognizes that parties have legitimate reasons for 
converting documents into different formats, and for requesting 
particular document formats. For example, a firm may need to convert a 
document into a particular format to comply with legal requirements to 
redact personal confidential information, such as customer Social 
Security numbers. A customer may need a document to contain metadata in 
order to establish when a broker learned specific information. FINRA 
believes that requiring production in a reasonably usable format and 
providing general guidance on e-discovery would provide arbitrators 
with the flexibility to tailor document production to the needs of each 
case.
    In conjunction with the proposed guidance on e-discovery, FINRA is 
proposing to amend the Guide's discussion on cost or burden of 
production. Currently, the Guide states that if the arbitrators 
determine that the document is relevant or likely to lead to relevant 
evidence, they should consider whether there are alternatives that can 
lessen the cost or burden impact, such as narrowing the time frame or 
scope of an item on the Lists, or determining whether another document 
can provide the same information. FINRA is mindful of the costs 
associated with e-discovery and is proposing to amend the cost or 
burden of production provision to advise arbitrators that they may 
order a different form of production if it would lessen the cost or 
burden impact of producing electronic documents. FINRA believes the 
additional guidance would raise arbitrator awareness of alternative 
ways to help parties to resolve an e-discovery dispute in a cost 
effective manner.
Product Cases
    In its 2011 order approving revisions to the Guide, the SEC noted 
that several commenters raised concerns that the revised Guide does not 
sufficiently address product cases, as described below.\4\ In response 
to these concerns, FINRA agreed to ask the Task Force to consider the 
topic. The Task Force recognized that product cases are unique customer 
cases that differ from other customer cases in several ways and 
recommended that FINRA add general guidelines to the Guide which 
describe how product cases are different from other customer cases and 
which outline the types of documents that parties typically request in 
such cases.
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    \4\ Supra Note 3.
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    FINRA is proposing to amend the Guide's introduction to add 
guidance on product cases. The Guide would state that a product case is 
one in which one or more of the asserted claims centers around 
allegations regarding the widespread mismarketing or defective 
development of a specific security or specific group of securities. The 
Guide would enumerate some of the ways that product cases are different 
from other customer cases, including that:
     The volume of documents tends to be much greater;
     Multiple investor claimants may seek the same documents;
     The documents are not client specific;
     The product at issue is more likely to be the subject of a 
regulatory investigation;
     The cases are more likely to involve a class action with 
documents subject to a mandatory hold; \5\
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    \5\ A mandatory hold is an act by an entity to preserve 
documents and electronic information relevant to a lawsuit or 
government investigation.
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     The same documents may have been produced to multiple 
parties in other cases involving the same security or to regulators; 
and
     Documents are more likely to relate to due diligence 
analyses performed by persons who did not handle the claimant's 
account.
    The Guide would explain that the two existing Lists may not provide 
all of the documents parties typically request in a product case 
relating to, among other things, a firm's: Creation of a product; due 
diligence reviews of a product; training on or marketing of a product; 
or post-approval review of a product. The text would emphasize that, in 
a product case, parties are not limited to the documents enumerated in 
the Lists. It would also emphasize that the Customer Code provides a 
mechanism for parties to seek additional documents. Finally, the Guide 
would explain that parties do not always agree on whether a case is a 
product case, and the arbitrators may ask the parties to explain their 
rationale for asserting that a case is, or is not, a product case.
    FINRA staff considered adding an item to the firm/associated person 
List that would enumerate specific documents that firms/associated 
persons would be required to produce when a customer alleged that a 
claim was a product case. Staff was mindful of the economic impact on 
firms that is associated with the larger volume of documents in product 
cases and rejected that approach. Instead, FINRA is proposing general 
guidelines on the types of documents that customers typically request 
in products cases because general guidelines would encourage parties to 
discuss their discovery needs and would encourage arbitrators to be 
flexible when making a determination on whether to order additional 
production.
Affirmations
    The Guide provides for affirmations when a party indicates that 
there are no responsive documents in the party's possession, custody, 
or control. The affirmation language provides that, upon the request of 
a party seeking documents, the customer, or appropriate person at the 
firm who has knowledge, must state that the party conducted a good 
faith search for the documents, describe the extent of the search, and 
state that based on the search there are no requested documents. Forum 
users raised concerns that the language creates a ``loop hole'' in 
which parties might assert that they are only required to provide an 
affirmation relating to production when no documents are produced, as 
opposed to situations where there is partial production. Some users 
were also concerned that parties might affirm that they did not find 
documents where they looked as opposed to looking for documents in all 
appropriate places. The Task Force

[[Page 37264]]

discussed the forum users' concerns and recommended that FINRA amend 
the affirmation language to add clarity to the provision.
    To respond to these concerns, FINRA is proposing to amend the 
affirmation language to make it clear that a party may request an 
affirmation when an opposing party makes only a partial production. The 
revised language would provide that, if a party does not produce a 
document specified in the Document Production Lists, upon the request 
of the party seeking the document that was not produced, the customer 
or the appropriate person at the brokerage firm who has knowledge must 
affirm in writing that the party conducted a good faith search for the 
requested document. FINRA is also proposing to require a party to state 
the sources searched in the affirmation. FINRA believes the proposed 
revision would add clarity to the affirmation text and reduce disputes 
over requests for affirmations.
Clarifying Amendments
    FINRA is proposing to add additional sub-headings to the Guide's 
introduction to break the introduction into distinct sections that 
address specific concerns. The new headings would be: Flexibility in 
Discovery; Cost or Burden of Production; Requests for Additional 
Documents; Form of Production; and Product Cases. FINRA believes the 
new headings will add clarity to the Guide.
    FINRA is proposing to move the sentence that reads: ``[w]here 
additional documents are relevant in a particular case, parties can 
seek them in accordance with the time frames provided in the 12500 
series of rules'' to the section that would be titled Requests for 
Additional Documents. FINRA also proposes to add the phrase ``may be'' 
before relevant to reflect that relevancy is not always established at 
the time that a party requests additional documents. Finally, FINRA 
proposes to amend the sentence in that paragraph that states that 
``[a]rbitrators must use their judgment in considering requests for 
additional documents and may not deny document requests on the grounds 
that the documents are not expressly listed in the Discovery Guide'' to 
add the term ``solely'' before the phrase ``on the grounds.'' FINRA 
believes that adding ``solely'' adds clarity to the Guide by ensuring 
that arbitrators understand that they should not automatically sustain 
an objection to production because a document is not expressly listed 
in the Guide.
 2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ 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 
reduce the number and limit the scope of disputes involving document 
production in customer cases, thereby improving the arbitration process 
for the benefit of public investors, broker-dealer firms, and 
associated persons.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA considered the potential 
impact of the proposed rule change on efficiency, competition, and 
capital formation. FINRA is concerned that production relating to e-
discovery and product cases can be time-consuming and costly for 
parties. The proposed revisions to the Guide would provide parties and 
arbitrators with guidance on how to handle e-discovery matters and 
document production relating to product cases in a flexible, efficient, 
and cost effective manner. The proposal would also clarify the 
provisions relating to affirmations and should reduce the inefficiency 
associated with disputes concerning affirmations.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-024 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-2013-024. 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 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 
10:00 a.m. and 3:00 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-2013-024 and should be 
submitted on or before July 11, 2013.

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-14683 Filed 6-19-13; 8:45 am]
BILLING CODE 8011-01-P