Document ID: SEC-2013-1637-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-09-20T04:00Z

[Federal Register Volume 78, Number 183 (Friday, September 20, 2013)]
[Notices]
[Pages 57916-57921]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22883]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70419; File No. SR-FINRA-2013-024]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to 
Amendments to the Discovery Guide Used in Customer Arbitration 
Proceedings, as Modified by Amendment No. 1

September 16, 2013.

I. Introduction

    On April 1, 2011, the Securities and Exchange Commission 
(``Commission'') approved a proposal filed by the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') to update the Discovery Guide 
(``Guide'') used in customer arbitration proceedings.\1\ According to 
FINRA, the Guide supplements the discovery rules contained in the FINRA 
Code of Arbitration Procedure for Customer Disputes (``Customer 
Code''). It includes an introduction describing the discovery process 
generally, and explains how arbitrators should apply the Guide in 
arbitration proceedings. The introduction is followed by two Document 
Production Lists (one for firms and associated persons, and one for 
customers) that enumerate the documents that parties should exchange 
without arbitrator or staff intervention (collectively, the ``Lists''). 
The Guide only applies to customer arbitration proceedings, and not to 
intra-industry cases.
---------------------------------------------------------------------------

    \1\ See Exchange Act Rel. No. 64166 (Apr. 1, 2011), 76 FR 19155 
(Apr. 6, 2011).
---------------------------------------------------------------------------

    As part of the rulemaking process to update the guide in April 
2011, FINRA agreed to establish the Discovery Task Force (``Task 
Force'') under the auspices of FINRA's National Arbitration and 
Mediation Committee. FINRA charged the Task Force with reviewing 
substantive issues relating to the Guide on a periodic basis to keep 
the Guide current as products change and new discovery issues arise. 
FINRA stated that it would ask the Task Force to review issues related 
to electronic discovery (``e-discovery'') and product cases.
    On June 3, 2013, FINRA filed with the Commission, pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
amend the Guide to provide general guidance on electronic discovery 
(``e-discovery'') issues and product cases and to clarify the existing 
provision relating to affirmations made when a party does not produce 
documents specified in the Guide. FINRA believes that the proposed rule 
change, as described below, fulfills its commitment to review the 
topics of e-discovery and product cases with the Task Force that FINRA 
established in 2011.\4\ The Task Force also reviewed concerns raised by 
forum users about a potential loophole created by the wording of the 
Guide's affirmation section describing when and how a party indicates 
that there are no responsive documents in the party's possession, 
custody, or control.
---------------------------------------------------------------------------

    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See supra note 1.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on June 20, 2013.\5\ The Commission received eighteen comment 
letters on the proposal.\6\ On September 4, 2013, FINRA responded to 
the comments and filed Amendment No. 1 to the proposed rule change.\7\ 
This order approves the proposed rule change, as modified by Amendment 
No. 1. The text of the proposed rule change, as modified by Amendment 
No. 1, is available on FINRA's Web site at 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.
---------------------------------------------------------------------------

    \5\ See Exchange Act Rel. No. 69761 (June 13, 2013), 78 FR 37261 
(June 20, 2013).
    \6\ Comment letters were submitted by Mary Alice McLarty, 
President, American Association for Justice, dated July 11, 2013 
(``AAJ Letter''); Katrina M. Boice, Aidikoff, Uhl and Bakhtiari, 
dated July 10, 2013 (``Boice Letter''); Carl J. Carlson, Tousley 
Brain Stephens, PLLC, dated July 11, 2013 (``Carlson Letter''); 
Steven B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated June 
20, 2013 (``Caruso Letter''); David T. Bellaire, Esq., Executive 
Vice President and General Counsel, Financial Services Institute, 
dated July 11, 2013 (``FSI Letter''); Glenn S. Gitomer, McCausland 
Keen & Buckman, dated July 11, 2013 (``Gitomer Letter''); Dale 
Ledbetter, Ledbetter & Associates, P.A., dated July 11, 2013 
(``Ledbetter Letter''); Seth E. Lipner, Professor of Law, Zicklin 
School of Business, Baruch College, Member Deutsch Lipner, dated 
July 11, 2013 (``Lipner Letter''); Peter Mougey, Levin, Papantonio, 
Thomas, Mitchell, Rafferty, & Proctor, P.A., dated July 11, 2013 
(``Mougey Letter''); Jill I. Gross, Director, Crystal Green, Student 
Intern, Susan Papacostas, Student Intern, Investor Rights Clinic, 
Pace University School of Law, dated July 11, 2013 (``Pace 
Letter''); Scott C. Ilgenfritz, President, Public Investors 
Arbitration Bar Association, dated July 11, 2013 (``PIABA Letter''); 
Scott Silver, Silver Law Group, dated July 11, 2013 (``Silver 
Letter''); Brian N. Smiley, Smiley Bishop Porter, LLP, dated July 
11, 2013 (``Smiley Letter''); John R. Snyder and Matthew C. 
Applebaum, Bingham McCutchen LLP, dated July 8, 2013 (``Snyder and 
Applebaum Letter''); Debra G. Speyer, Esq., Law Offices of Debra G. 
Speyer, dated July 10, 2013 (``Speyer Letter''); Victoria 
Mikhelashvili, Legal Intern, Nathaniel R. Torres, Legal Intern, and 
Christine Lazaro, Esq., Director, Securities Arbitration Clinic, St. 
Vincent DePaul Legal Program, Inc., St. John's University School of 
Law, dated July 11, 2013 (``St. John's Letter''); Leonard Steiner, 
Attorney, dated July 10, 2013 (``Steiner Letter''); and Matthew W. 
Woodrufff, Esq., Attorney at Law, dated July 10, 2013 (``Woodruff 
Letter'').
    \7\ Letter from Margo A. Hassan, Assistant Chief Counsel, FINRA 
Dispute Resolution, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 4, 2013.
---------------------------------------------------------------------------

II. Description of the Proposal

A. E-Discovery

1. Form of Production
    FINRA is proposing to amend the Guide's introduction to state that 
parties are encouraged to discuss the form in which they intend to 
produce documents and, whenever possible, to agree to the form of 
production. The provision would require parties to produce electronic 
files in a ``reasonably usable format.'' The term ``reasonably usable 
format'' would refer, generally, to the format in which a party 
ordinarily maintains a document, or to a converted format that does not 
make it more difficult or burdensome for the requesting party to use 
during a proceeding.
    The proposed guidance would also state that when arbitrators are 
resolving contested motions about the form of document production, they 
should consider the totality of the circumstances, including:
    (1) For documents in a party's possession or custody, whether the 
chosen form of production is different from the form in which a 
document is ordinarily maintained;
    (2) For documents that must be obtained from a third-party (because 
they are not in a party's possession or custody), whether the chosen 
form of production is different from the form in which the third-party 
provided it; and
    (3) For documents converted from their original format, a party's 
reasons for choosing a particular form of production; how the documents 
may have been affected by the conversion to a new format; and whether 
the requesting party's ability to use the documents is diminished by 
any change in the documents' appearance,

[[Page 57917]]

searchability, metadata, or maneuverability.
    Regarding the third factor, FINRA states that it intends to provide 
arbitrators with guidance on the terms ``appearance,'' 
``searchability,'' ``metadata,'' and ``maneuverability'' in training 
materials to be posted on its Web site.
2. Cost or Burden of Production
    In conjunction with the proposed guidance on e-discovery, FINRA 
also proposes to amend the Guide's discussion on cost or burden of 
production. Currently, the Guide states that if the arbitrators 
determine that the document is relevant or likely to lead to relevant 
evidence, they should consider whether there are alternatives that can 
lessen the cost or burden impact, such as narrowing the time frame or 
scope of an item on the Lists, or determining whether another document 
can provide the same information. FINRA proposes to amend this 
provision to advise arbitrators that they may order a different form of 
production if it would lessen the cost or burden impact of producing 
electronic documents.
    FINRA believes that requiring document production in a reasonably 
usable format and providing general guidance on e-discovery and the 
costs and benefits of document production would provide arbitrators 
with the awareness and flexibility to tailor document production to the 
needs of each case and help parties to resolve an e-discovery dispute 
in a cost effective manner.

B. Product Cases

    FINRA is proposing to amend the Guide's introduction to add 
guidance on product cases. The Guide would state that a ``product 
case'' is one in which one or more of the asserted claims centers 
around allegations regarding the widespread mismarketing or defective 
development of a specific security or specific group of securities. The 
Guide would enumerate some of the ways that product cases differ from 
other customer cases. In particular, in product cases: (1) The volume 
of documents tends to be much greater; (2) multiple investor claimants 
may seek the same documents; (3) the documents are not client specific; 
(4) the product at issue is more likely to be the subject of a 
regulatory investigation; (5) the cases are more likely to involve a 
class action with documents subject to a mandatory hold;\8\ (6) the 
same documents may have been produced to multiple parties in other 
cases involving the same security or to regulators; and (7) documents 
are more likely to relate to due diligence analyses performed by 
persons who did not handle the claimant's account.
---------------------------------------------------------------------------

    \8\ A mandatory hold is an act by an entity to preserve 
documents and electronic information relevant to a lawsuit or 
government investigation.
---------------------------------------------------------------------------

    The Guide would explain that the Lists may not provide all of the 
documents parties typically request in a product case relating to, 
among other things, a firm's creation of a product, due diligence 
reviews of a product, training on or marketing of a product, or post-
approval review of a product. The Guide would emphasize that, in a 
product case, parties are not limited to the documents enumerated in 
the Lists. It would also stress that the Customer Code provides a 
mechanism for parties to seek additional documents. Finally, the Guide 
would explain that parties do not always agree on whether a case is a 
product case, and the arbitrators may ask the parties to explain their 
rationale for asserting that a case is, or is not, a product case.

C. Affirmations

    The Guide provides for affirmations when a party indicates that 
there are no responsive documents in the party's possession, custody, 
or control. The ``affirmation language'' provides that, upon the 
request of a party seeking documents, the customer, or appropriate 
person at the firm who has knowledge, must state that the party 
conducted a good faith search for the documents, describe the extent of 
the search, and state that based on the search there are no requested 
documents (the ``Affirmation Language'').
    FINRA is proposing to amend the Affirmation Language to make clear 
that a party may request an affirmation when an opposing party makes 
only a partial production. The revised language would provide that, if 
a party does not produce a document specified in the Lists, upon the 
request of the party seeking the document that was not produced, the 
customer or the appropriate person at the brokerage firm who has 
knowledge must affirm in writing that the party conducted a good faith 
search for the requested document. FINRA is also proposing to require a 
party to state the sources searched in the affirmation.
    FINRA believes that the proposed revisions would clarify the 
Affirmation Language and reduce disputes over requests for 
affirmations.

D. Clarifying Amendments

    FINRA is proposing to add additional sub-headings to the Guide's 
introduction to break the introduction into distinct sections that 
address specific concerns. The new headings would be: ``Flexibility in 
Discovery;'' ``Cost or Burden of Production;'' ``Requests for 
Additional Documents;'' ``Form of Production;'' and ``Product Cases.''
    FINRA is also proposing to move the sentence that reads: ``[w]here 
additional documents are relevant in a particular case, parties can 
seek them in accordance with the time frames provided in the 12500 
series of rules'' to the section that would be titled ``Requests for 
Additional Documents.'' FINRA is also proposing to add the phrase ``may 
be'' before ``relevant'' to reflect that relevancy is not always 
established at the time that a party requests additional documents. 
Finally, FINRA is proposing to amend the sentence in that paragraph 
that states that ``[a]rbitrators must use their judgment in considering 
requests for additional documents and may not deny document requests on 
the grounds that the documents are not expressly listed in the 
Discovery Guide'' to add the term ``solely'' before the phrase ``on the 
grounds.''
    FINRA believes that the proposed clarifying amendments will add 
clarity to the Guide.

III. Summary of Comment Letters and FINRA's Response

    As noted above, the Commission received eighteen comment letters on 
the proposed amendments to the Guide.\9\ While the comment letters 
expressed general support for the proposed amendments, each comment 
letter raised concerns with particular aspects of the proposed 
amendments. The comment letters and FINRA's response \10\ are 
summarized below.
---------------------------------------------------------------------------

    \9\ See supra note 6.
    \10\ See supra note 7.
---------------------------------------------------------------------------

A. E-Discovery

1. Form of Production
    One commenter suggested that production of a document in one format 
(electronically) should not preclude its production in other 
formats.\11\ This commenter also stated that a party should be 
permitted to seek production of a document in the format in which it 
was given to the customer and also in a summary format. In addition, 
this commenter urged FINRA to require a firm, at the request of the 
customer, to produce a document in any or all of the formats that the 
firm makes available to customers online.
---------------------------------------------------------------------------

    \11\ See Woodruff Letter.
---------------------------------------------------------------------------

    FINRA responded that cooperation between parties is a ``hallmark of

[[Page 57918]]

discovery in the FINRA forum.''\12\ Accordingly, FINRA stated that its 
proposal amends the Guide to highlight its expectation that the parties 
will discuss their discovery needs and, whenever possible, agree to the 
format. To facilitate agreement, FINRA noted that the proposal also 
requires parties to produce electronic files in a ``reasonably usable 
format.'' FINRA believes that requiring cooperation in discovery, and 
requiring parties to produce documents in a reasonably usable format, 
are sufficient to ensure that parties are able to get the documents 
they need in a suitable format. Therefore, FINRA believes the 
commenter's suggested revisions are unnecessary.
---------------------------------------------------------------------------

    \12\ See FINRA Rule 12505 of the Customer Code (Cooperation of 
Parties in Discovery) (requiring parties to cooperate to the fullest 
extent practicable in the exchange of documents to expedite the 
arbitration).
---------------------------------------------------------------------------

    One commenter recommended that FINRA add ``the size of the 
proceeding'' and ``the relative resources of the parties'' to the list 
of factors that arbitrators consider when they are determining whether 
electronic files have been produced in a reasonably usable format.\13\ 
Similarly, another commenter suggested that FINRA advise its 
arbitrators to consider the potential costs to customers of producing 
documents in certain formats.\14\ A different commenter urged FINRA to 
amend the Guide to state that parties are expected to discuss key words 
and phrases to be used to search for documents prior to production.\15\
---------------------------------------------------------------------------

    \13\ See Woodruff Letter.
    \14\ See Pace Letter (stating that ``customers of limited means 
may have difficulty producing documents in any format other than 
hard copy'').
    \15\ See St. John's Letter.
---------------------------------------------------------------------------

    FINRA acknowledged the concerns of these three commenters but 
believes they are best addressed through arbitrator training. 
Accordingly, FINRA stated that it will identify these concerns in its 
arbitrator training materials, which are published on FINRA's Web site.
    One commenter suggested that FINRA revise its proposed definition 
of ``reasonably useable format'' by replacing the phrase ``during a 
proceeding'' with ``in connection with the arbitration'' to clarify 
that the requirement applies to all pre-hearing phrases of the 
arbitration and is not limited to the arbitration hearing itself.\16\ 
FINRA responded that it intended the requirement to apply all phases of 
the proceeding and amended the proposal as suggested.
---------------------------------------------------------------------------

    \16\ See Woodruff Letter.
---------------------------------------------------------------------------

    One commenter recommended that FINRA revise one of the factors 
arbitrators consider when determining whether documents are being 
produced in a reasonably useable format by replacing the word 
``maneuverability'' with ``versatility.'' \17\ FINRA believes that the 
term ``maneuverability'' was correctly defined and was the appropriate 
term in the context of the proposed amendments. FINRA therefore 
declined to amend the Guide as the commenter proposed.
---------------------------------------------------------------------------

    \17\ See Woodruff Letter (recommending revising the factor to 
read ``whether the requesting party's ability to use the documents 
is diminished by a change in the documents' appearance, 
searchability, metadata, or versatility'').
---------------------------------------------------------------------------

    One commenter suggested that allowing arbitrators to determine the 
relevance of documents and consider alternatives to e-discovery, as 
proposed, would make it more difficult for plaintiffs to discover 
relevant information.\18\ As an alternative, that commenter recommended 
that FINRA rely on the subparts of Rule 26 of the Federal Rules of 
Civil Procedure relating to e-discovery as a guidepost.\19\
---------------------------------------------------------------------------

    \18\ See AAJ Letter.
    \19\ See Fed. R. Civ. P. 26(f) (Conference of the Parties; 
Planning for Discovery) (in relevant part, generally requiring the 
parties to meet and confer to develop a discovery plan); and Fed. R. 
Civ. P. 26(b)(2)(C) (requiring the court to limit the frequency and 
extent of discovery based on certain facts and circumstances, such 
as the discovery sought is unreasonably cumulative or duplicative, 
or can be obtained from some other source that is more convenient, 
less burdensome, or less expensive; the party seeking discovery has 
had ample opportunity to obtain the information by discovery in the 
action; or the burden or expense of the proposed discovery outweighs 
its likely benefit, considering the needs of the case, the amount in 
controversy, the parties' resources, the importance of the issues at 
stake in the action and the importance of the discovery in resolving 
the issues).
---------------------------------------------------------------------------

    FINRA responded that it believes that arbitrators are in the best 
position to manage the discovery process and to determine the relevance 
of requested documents. FINRA also stated that the Guide currently 
provides arbitrators the flexibility to tailor the discovery process to 
the facts and circumstances of each case, including the needs of the 
parties. FINRA believes that the proposed rule change furthers 
flexibility in the discovery process by (1) directing arbitrators to 
consider the totality of the facts and circumstances when resolving 
motions related to the form of production and (2) requiring parties to 
produce electronic documents in a reasonably usable format. In sum, 
FINRA believes the proposal would improve the efficiency and cost 
effectiveness of the arbitration process. FINRA also believes that the 
proposed guidance is consistent with the principles of the Federal 
Rules of Civil Procedure governing discovery cited by the 
commenter.\20\ Therefore, FINRA declined to amend the proposed rule 
change as suggested by the commenter.
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

    One commenter requested that FINRA include language in the Guide 
requiring the producing party to state whether the documents being 
produced are in the format in which they are ordinarily maintained, or 
in the case of documents obtained from a third-party, the format in 
which the third party provided them. In this commenter's view, if a 
party produces documents in a format different than the format in which 
they are ordinarily maintained or were obtained from a third-party, the 
party should explain the differences between them in detail sufficient 
for the recipient to understand their significance, including whether 
the party omitted any information from the original format.\21\
---------------------------------------------------------------------------

    \21\ See Carlson Letter.
---------------------------------------------------------------------------

    FINRA responded that it believes that the proposal already 
addresses the commenter's concerns. Specifically, FINRA stated that the 
proposal would encourage parties to discuss and agree, if possible, to 
the form in which they intend to produce documents, and instruct 
arbitrators who are resolving disputes about the form of production to 
consider (1) whether the form of productions is different from the form 
in which the document is ordinarily maintained; (2) whether it is 
different from the form that was received from a third-party; and (3) 
the producing party's reasons for converting a document to a particular 
form for production and how the conversion may have affected the 
documents. Therefore, FINRA declined to amend the proposal as requested 
by the commenter.
    One commenter viewed the proposal as vague and suggested that FINRA 
state that if parties are unable to reach an agreement regarding the 
form of production, the responding party should produce an electronic 
document in the form in which it is ordinarily maintained or in a 
reasonably usable format.\22\ FINRA responded that the proposal would 
require parties to produce electronic documents in a ``reasonably 
usable format'' and that it believes its definition of ``reasonably 
usable'' is sufficiently clear. Therefore, FINRA declined to amend the 
proposed rule change as suggested by the commenter.
---------------------------------------------------------------------------

    \22\ See Mougey Letter.
---------------------------------------------------------------------------

2. Cost or Burden of Production
    One commenter objected to the proposal to advise arbitrators that 
they may order a different form of production

[[Page 57919]]

if it would lessen the cost or burden impact of producing electronic 
documents.\23\ Three commenters requested that FINRA provide 
specificity on how parties would demonstrate that the cost or burden of 
production is disproportionate to the need for the document.\24\ One 
commenter suggested that FINRA require firms objecting to production 
based on the cost or burden to submit an affidavit specifying their 
objection.\25\ Similarly, another commenter recommended requiring a 
party objecting to production based on the cost or burden to submit an 
affirmation of the purported cost or burden.\26\ One commenter urged 
FINRA to amend the Guide to state that arbitrators should ``highly 
scrutinize'' a firm's objections to production based on the cost or 
burden of e-discovery.\27\ In addition, one commenter suggested that 
FINRA educate its arbitrators about the importance of making parties 
substantiate any objections to production based on cost and burden.\28\
---------------------------------------------------------------------------

    \23\ See AAJ Letter.
    \24\ See Pace Letter, Speyer Letter, and St. John's Letter.
    \25\ See PIABA Letter.
    \26\ See Caruso Letter.
    \27\ See Mougey Letter.
    \28\ See Smiley Letter.
---------------------------------------------------------------------------

    FINRA responded that FINRA Rule 12508 requires a party objecting to 
producing documents on the Lists or pursuant to a request made under 
FINRA Rule 12507 (Other Discovery Requests) to explain, in writing, the 
basis for the party's objection. Accordingly, a party objecting to 
production based on cost or burden must explain the basis for the 
party's objection to the arbitrators. The arbitrators must then 
determine whether the party's demonstration is sufficient or if an 
affidavit or affirmation is required. Accordingly, FINRA believes the 
Customer Code and the Guide are sufficient to require parties to 
support their objections and that its arbitrator training materials are 
sufficient to make arbitrators aware of their obligations to require 
parties to substantiate objections to production based on the cost and 
burden. Therefore, FINRA declined to amend the proposal as suggested by 
the commenters.

B. Product Cases

    Several commenters supported FINRA's proposal to add general 
guidance about the types of documents that parties typically request in 
product cases \29\ and, in particular, FINRA's acknowledgement that 
parties typically request certain types of documents in product cases 
that may not be on the Lists.\30\ Several commenters, however, 
suggested revisions.
---------------------------------------------------------------------------

    \29\ See Boice Letter, Caruso Letter, FSI Letter, Gitomer 
Letter, Pace Letter, PIABA Letter, Silver Letter, Smiley Letter, and 
Speyer Letter.
    \30\ See Boice Letter, Caruso Letter, Gitomer Letter, PIABA 
Letter, and Speyer Letter.
---------------------------------------------------------------------------

    Three commenters recommended that FINRA adopt a Document Production 
List specific to product cases.\31\ One of the commenters asserted that 
without a list of presumptively discoverable documents, arbitrators 
could perceive the requested documents as less discoverable.\32\ 
Another commenter opined that FINRA's description of the types of 
documents that parties typically request in product cases in the 
introduction to the Guide would create a new category of discoverable 
documents, which could confuse arbitrators and customers.\33\
---------------------------------------------------------------------------

    \31\ See Mougey Letter, Pace Letter, and St. John's Letter.
    \32\ See Pace Letter.
    \33\ See St. John's Letter.
---------------------------------------------------------------------------

    FINRA responded that it considered adding an item to the firm/
associated person Document Production List that would enumerate 
specific documents that firms/associated persons would be required to 
produce when a customer alleged that a claim was a product case. FINRA 
believes, however, that having a list of presumptively discoverable 
documents for parties to exchange without arbitrator or staff oversight 
might not be appropriate in the context of product cases. FINRA 
believes that such a list would have a significant economic impact on 
firms because the typical volume of documents associated with product 
cases is high, even though not every presumptively discoverable 
document would have probative value for every product case. 
Alternatively, FINRA stated that adopting general guidance would allow 
the parties and arbitrators to tailor document discovery to the facts 
and circumstances of each specific product case. Therefore, FINRA 
declined to amend the proposal as suggested by the commenters.
    Two commenters recommended that FINRA advise arbitrators to 
consider the cost or burden of production when deciding whether to 
order the production of product specific documents at the request of a 
customer.\34\ FINRA responded that the introduction to the Guide 
provides general guidance for arbitrators considering objections based 
on the cost or burden of production. FINRA stated that it expects 
arbitrators to apply this guidance, as appropriate, throughout the 
discovery process in all types of cases, including product cases. FINRA 
also stated that upon approval of the proposal it would publish in its 
arbitrator training materials instructions for arbitrators to consider 
the cost or burden of production when deciding whether to order the 
production of product specific documents. For those reasons, FINRA 
declined to amend the proposal as suggested.
---------------------------------------------------------------------------

    \34\ See FSI Letter and Snyder and Applebaum Letter.
---------------------------------------------------------------------------

    One commenter urged FINRA to specify that it does not intend to 
sanction broad discovery requests for production made in other cases or 
in response to a regulatory request (i.e., ``shortcut'' discovery).\35\ 
FINRA responded that the Customer Code and the Guide require parties to 
cooperate in discovery. Thus, if a party objects to a request because 
it is overly broad and/or lacks appropriate specificity, FINRA expects 
the parties to discuss the issue. If the parties fail to resolve their 
discovery issue, FINRA believes that the party objecting to production 
has the responsibility for articulating the objection. Accordingly, 
FINRA believes that it is unnecessary to specifically state that it 
does not sanction ``shortcut'' discovery. Therefore, FINRA declined to 
amend the proposal as suggested by the commenter.
---------------------------------------------------------------------------

    \35\ See Snyder and Applebaum Letter.
---------------------------------------------------------------------------

    In its proposal, FINRA listed several ways that product cases 
differ from other customer cases and described the types of documents 
that parties typically request in products cases. One commenter 
suggested that FINRA state that (1) the presence of the enumerated 
differences may not justify a threshold finding that a claim is a 
product case, and (2) the list of documents that parties typically 
request should not be the ``touchstone for what is relevant'' and/or 
discoverable in a product case.\36\ FINRA responded that it designed 
the proposed guidance to educate parties and arbitrators about product 
cases, and when the parties disagree about whether a claim centers 
around a product, to provide a mechanism for arbitrators to make a 
threshold determination that a claim is, or is not, a product case. 
Furthermore, it describes the types of documents that parties typically 
request in product cases as a signal to the arbitrators that discovery 
in product cases might reasonably go beyond the documents enumerated in 
the Lists. For these reasons, FINRA declined to amend the proposal as 
suggested.
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    Another commenter suggested that FINRA provide specific guidance to 
arbitrators regarding the scope of discovery in product cases to 
prevent firms from limiting product discovery to

[[Page 57920]]

information given to the claimant or communications regarding the 
claimant, rather than to information or communications relating to the 
product.\37\ FINRA responded that the proposal already addresses the 
commenter's concern because it (1) explains how product cases differ 
from other customer cases and (2) instructs arbitrators that the 
standard for discovery in the forum is whether a document is relevant 
or likely to lead to relevant evidence.\38\ Therefore, FINRA declined 
to amend the proposed rule change as suggested by the commenter.
---------------------------------------------------------------------------

    \37\ See Mougey Letter.
    \38\ See the Arbitrator's Guide (at page 34) and the ``Discovery 
Abuses & Sanctions'' Training. Both documents are available on 
FINRA's Web site at http://www.finra.org.
---------------------------------------------------------------------------

C. Affirmations

    Four commenters opined that the Affirmation Language in the Guide 
should not distinguish between documents on the Lists and additional 
documents requested.\39\ Accordingly, they urged FINRA to replace the 
provision allowing arbitrators to order an affirmation regarding 
additional documents not on the Lists with a requirement for parties to 
submit an affirmation at the request of a party seeking additional 
documents not on the Lists. One commenter supported maintaining the 
distinction between documents on the Lists and additional 
documents.\40\ This commenter noted that the documents enumerated on 
the Lists were subject to Commission review and a public comment 
period, while any additional documents requested would not have been 
subject to the same process.
---------------------------------------------------------------------------

    \39\ See Caruso Letter, Pace Letter, Speyer Letter, and St. 
John's Letter.
    \40\ See Snyder and Applebaum Letter.
---------------------------------------------------------------------------

    FINRA responded that it believes that the commenters' concerns 
require additional analysis and consideration. FINRA also stated that 
the proposed rule change is an important step toward improving the 
Guide language on affirmations and should be approved by the Commission 
at this time. Therefore, while FINRA declined to amend the proposal as 
suggested by the commenters, it stated that it will discuss their 
comments with the Task Force and monitor the impact of amending the 
Affirmation Language as proposed. FINRA stated that its staff would 
then consider whether to seek FINRA Board approval of future amendments 
to the Affirmation Language.
    One commenter suggested that FINRA clarify that it did not intend 
to require affirmations in virtually all cases.\41\ FINRA responded 
that it believes that the obligations and guidance regarding 
cooperation in discovery as detailed in the Customer Code and Guide are 
sufficient to ensure that parties do not routinely require 
affirmations. Therefore, FINRA declined to amend the proposal as 
suggested by the commenter.
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

    Another commenter recommended that FINRA amend the Guide to require 
a producing party to identify the words used in an electronic search 
for documents so that the requesting party could determine if the 
search was appropriately comprehensive.\42\ FINRA responded by 
reiterating its belief that pursuant to the Customer Code and Guide 
parties should discuss their search terms. Furthermore, FINRA believes 
that the topic should be addressed in arbitrator training, rather than 
in the Guide. Therefore, while FINRA declined to amend the Affirmation 
Language, it stated that it will include a discussion on search terms 
in the arbitrator training materials on e-discovery if the Commission 
approves the proposal.
---------------------------------------------------------------------------

    \42\ See St. John's Letter.
---------------------------------------------------------------------------

D. Training Materials

    One commenter suggested that FINRA published text related to the 
proposal in its arbitrator training material prior to Commission 
approval of the proposed rule change.\43\ FINRA responded that it 
drafted the training materials at issue independent of the proposed 
rule change. FINRA also stated that it published the training materials 
at the recommendation of the Task Force to prepare arbitrators to 
address the issues unique to product cases that could come before them. 
In addition, FINRA stated that it drafted arbitrator training materials 
consistent with the proposed guidance on product cases and will publish 
them if the Commission approves the proposal.
---------------------------------------------------------------------------

    \43\ See Snyder and Applebaum Letter.
---------------------------------------------------------------------------

E. Monitoring Implementation

    One commenter recommended that the Task Force monitor the 
implementation of the proposed guidance, including by polling 
arbitrators and claimants' counsel, and suggested possible follow-up 
action if FINRA's general guidance proves insufficient.\44\ Similarly, 
another commenter encouraged FINRA and the Commission to monitor the 
extent to which the proposed amendments satisfy parties' discovery 
needs.\45\ FINRA responded that it will monitor implementation of the 
proposed rule change and work with the Task Force to design a survey 
for parties and arbitrators that would gauge the success of the new 
guidance. FINRA stated that, depending on its findings, it would then 
consider next steps.
---------------------------------------------------------------------------

    \44\ See PIABA Letter.
    \45\ See Smiley Letter.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Exchange Act and rules and regulations 
thereunder applicable to a national securities association.\46\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Exchange Act Section 15A(b)(6),\47\ which requires, 
among other things, that the rules of a national securities association 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \46\ In approving the proposed rule change, the Commission has 
considered the impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \47\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments to the Guide 
would improve the arbitration process for the benefit of public 
investors, broker-dealer firms, and associated persons who use the 
FINRA Forum. Specifically, the Commission believes that the proposed 
amendments would, among other things, help reduce the number and limit 
the scope of disputes involving document production and other matters, 
particularly with regard to e-discovery and product cases.
    The Commission has considered the commenters' views on the proposed 
rule change and believes that FINRA responded appropriately to the 
concerns raised. The Commission believes that, as FINRA noted in its 
response letter, many of the comments have been addressed by the 
proposed amendments or will be addressed through arbitrator training. 
The Commission notes that FINRA stated that it consulted with the Task 
Force in developing its responses to commenters. Moreover, FINRA stated 
that it has committed to consult with the Task Force on its arbitrator 
training

[[Page 57921]]

materials, and will continue to work with the Task Force to monitor 
implementation of the proposed amendments. In addition, FINRA stated 
that it will share the results of its survey with the Task Force and 
consider any recommendations that Task Force makes for further 
improvements to the Guide.
    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Exchange Act Section 19(b)(2) 
\48\ that the proposed rule change (SR-FINRA-2013-024), as modified by 
Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22883 Filed 9-19-13; 8:45 am]
BILLING CODE 8011-01-P