Document ID: SEC-2012-1508-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc
Posted Date: 2012-09-13T04:00Z

[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Notices]
[Pages 56694-56697]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22521]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67803; File No. SR-FINRA-2012-041]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change to Amend the 
Customer and Industry Codes of Arbitration Procedure Relating to 
Subpoenas and to Arbitrator Authority To Direct the Appearance of 
Associated Person Witnesses and the Production of Documents Without 
Subpoenas

September 7, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 56695]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 24, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by FINRA. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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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 Customer and Industry Codes of 
Arbitration Procedure (collectively ``Codes''), to provide that when 
specified industry parties seek the appearance of witnesses or the 
production of documents from FINRA members (and individuals associated 
with the members) that are not parties to the arbitration, FINRA 
arbitrators shall issue orders for the appearance of witnesses or the 
production of documents, instead of issuing subpoenas. The proposed 
rule change would add procedures for non-parties to object to subpoenas 
and arbitrator orders of production (``arbitrator orders''). It would 
also standardize procedures under the Codes relating to: Service of 
motions for subpoenas and arbitrator orders; service of issued 
subpoenas and arbitrator orders; and time frames for responding to 
subpoenas and arbitrator orders, making them operationally consistent.
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend the Codes to provide that, when 
specified industry parties seek the appearance of witnesses or the 
production of documents from FINRA members (and individuals associated 
with the members) that are not parties to the arbitration, FINRA 
arbitrators shall issue orders for the appearance of witnesses or the 
production of documents, instead of issuing subpoenas, and to 
standardize certain procedures relating to subpoenas and arbitrator 
orders.
Subpoenas
    The Codes give arbitrators the authority to issue subpoenas to 
parties and non-parties. Subpoena Rules 12512 and 13512 (``Subpoena 
Rules'') set forth procedures for a party to make a motion for a 
subpoena. A party must make a written motion requesting that an 
arbitrator issue a subpoena to a party or non-party. The motion must 
include a draft subpoena and the party must serve the motion on each 
other party. The party may not serve the motion or draft subpoena on a 
non-party. The Subpoena Rules also detail how a party may object to a 
subpoena and reply to an objection. If the arbitrator issues a 
subpoena, the party that requested the subpoena must serve the subpoena 
at the same time and in the same manner on all parties and, if 
applicable, on any non-party receiving the subpoena. Finally, the 
Subpoena Rules describe how parties must share documents produced under 
a subpoena.
    The Subpoena Rules do not address who bears the costs of production 
under a subpoena issued to either a party or a non-party. In practice, 
arbitrators resolve disputes between parties, and between parties and 
non-parties, relating to costs associated with subpoenas. In addition, 
the Subpoena Rules do not provide a means for non-parties to object to 
subpoenas served upon them. As a matter of practice, FINRA permits non-
parties to file objections to subpoenas. The objections may include a 
request for the arbitrators to determine who pays the costs of 
production.
Arbitrator Orders
    The Codes authorize arbitrators to order FINRA firms, their 
employees, and/or their associated persons to appear and to produce 
documents without using the subpoena process. Unlike the Subpoena 
Rules, Rules 12513 and 13513 (``Order Rules'') expressly address the 
costs relating to non-party production by firms and their employees/
associated persons. The Order Rules provide that, unless the panel 
directs otherwise, the party requesting the appearance of witnesses or 
the production of documents from non-parties pays the reasonable costs 
of the appearance and/or production.
Proposed Amendments to the Subpoena Rules
    FINRA believes that a party firm's responsibility to reimburse a 
non-party firm (or its employees or associated persons) for production 
costs should be the same regardless of whether the party firm requests 
a subpoena or an arbitrator order. FINRA also believes that members and 
associated persons would be better served by requesting an arbitrator 
order. Arbitrator orders offer an efficient mechanism for obtaining the 
appearance of witnesses and production of documents from FINRA members 
and their employees. While the Codes provide an enforcement mechanism 
for subpoenas and arbitrator orders,\3\ typically, once an arbitrator 
issues a subpoena, non-compliance is handled away from the arbitration 
forum through the courts. Conversely, FINRA staff and the arbitrators 
who are familiar with the case handle requests for arbitrator orders. 
Another advantage to using an arbitrator order is that arbitrator 
orders are not subject to the geographical limitations contained in 
subpoena statutes.
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    \3\ IM-12000 states that it may be deemed conduct inconsistent 
with just and equitable principles of trade and a violation of Rule 
2010 for a member or a person associated with a member to fail to 
appear or to produce any document in his possession or control as 
directed pursuant to provisions of the Code (see Customer Code of 
Arbitration Procedure Part I--Interpretative Material, Definitions, 
Organization and Authority).
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    Arbitrator orders are cost effective for forum users because 
members and associated persons avoid the costs and risks associated 
with court proceedings. FINRA does not believe that the proposal would 
impact firms' ability to obtain documents and witnesses at the forum.
    Since the Codes provide a mechanism through the Order Rules for 
seeking production of documents and witnesses without resorting to the 
subpoena process, FINRA believes that arbitrators should use this 
mechanism first. FINRA is proposing to amend the Subpoena Rules to 
provide that unless circumstances dictate the need for a subpoena, 
arbitrators shall not issue subpoenas to non-party FINRA members and/or 
employees or associated persons of non-party FINRA members at the

[[Page 56696]]

request of FINRA members and/or employees or associated persons of 
FINRA members. The proposal states that if the arbitrators determine 
that the request for the appearance of witnesses or the production of 
documents should be granted, then the arbitrators should order the 
appearance of such persons or the production of documents from such 
persons or non-party FINRA members under the Order Rules. An arbitrator 
might order a subpoena if, for example, a firm failed to produce 
documents pursuant to an arbitrator order, or if a former associated 
person of a FINRA member has left the industry and the arbitrator 
believes that an arbitrator order would not be effective.
    Under the proposed rule change, FINRA would add new Rules 12512(g) 
and 13512(g) to address costs when a FINRA member and/or employee or 
associated person requests a subpoena directed to a non-party FINRA 
member and/or employee or associated person. If an arbitrator issues a 
subpoena, the party requesting the subpoena shall pay the reasonable 
costs of the non-party's appearance and/or production, unless the panel 
directs otherwise.
    Finally, FINRA is proposing to add new Rules 12512(e) and 13512(e) 
to provide a mechanism for non-parties to object to a subpoena that an 
arbitrator issues to them. Under the new provisions, if a non-party 
receiving a subpoena objects to the scope or propriety of the subpoena, 
the non-party may, within 10 calendar days of service of the subpoena, 
file written objections with the Director. The Director shall forward a 
copy of the written objections to the arbitrator and all other parties. 
The party that requested the subpoena may respond to the objections 
within 10 calendar days of receipt of the objections. After considering 
all objections, the arbitrator responsible for issuing the subpoena 
shall rule promptly on the objections. The proposed amendments would 
codify FINRA's current practice relating to objections.
Proposed Amendments to the Order Rules
    As stated above, the Order Rules authorize arbitrators to order 
FINRA firms, their employees, and/or their associated persons to appear 
and to produce documents without using the subpoena process. The rules 
also provide that unless the panel directs otherwise, the party 
requesting the appearance of witnesses or the production of documents 
from non-parties pays the reasonable costs of the appearance and/or 
production.
    FINRA is proposing to amend the Order Rules to incorporate the 
procedures outlined in the Subpoena Rules for making, objecting to, and 
serving motions, and which detail how parties must share documents 
received from non-parties. Finally, FINRA is proposing to amend the 
Order Rules to provide for non-party objections to an arbitrator's 
order. The proposed rule change will standardize FINRA's procedures 
relating to Arbitrator Orders.
Arbitrators' Authority To Assess Production Costs
    As stated above, under proposed new Rules 12512(g) and 13512(g), if 
the arbitrators issue a subpoena, the party requesting the subpoena 
shall pay the reasonable costs of the non-party's appearance and/or 
production, unless the panel directs otherwise. If a dispute arises 
regarding who pays the production costs and whether a stated amount is 
reasonable, the proposed rule change allows the arbitrators to 
determine the reasonable costs and to assess responsibility for paying 
them. The amendments would codify the current practice relating to how 
FINRA handles such disputes. The proposed rule change eliminates the 
current disparity between how the Codes treat costs under the Subpoena 
Rules and the Order Rules for member requests to non-party members for 
the appearance of witnesses and production of documents.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\4\ 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 would 
eliminate a disparity between how the Codes treat costs under the 
Subpoena Rules and the Order Rules for member requests to non-party 
members for the appearance of witnesses and production of documents and 
could lower discovery costs to member firms and their associated 
persons and employees. The proposed amendments would also enhance the 
user experience at the forum by standardizing certain procedures 
relating to subpoenas and arbitrator orders.
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    \4\ 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. The proposal would enhance the 
efficiency of the FINRA forum for FINRA members and their associated 
persons and employees because it would require them to use the Order 
Rules for obtaining the appearance of witnesses and the production of 
documents from non-party FINRA firms (and their associated persons and 
employees) during an arbitration proceeding. It would also remove the 
financial burden associated with document production for non-party 
FINRA firms (and their associated persons and employees) that must 
produce documents because the proposed rule change requires the firm 
party requesting documents to bear the reasonable cost of the non-
party's production. Due to the nature of the proposed rule change, 
FINRA does not believe that the proposal will impact competition or 
capital formation. The proposed rule change aims to enhance the 
efficiency of the forum for its users, as explained above, and seeks to 
ensure that the arbitrators assess the reasonable costs of discovery 
during an arbitration proceeding to the industry parties involved in 
the dispute.

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.

[[Page 56697]]

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-2012-041 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-2012-041. 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 
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-2012-041 and should be 
submitted on or before October 4, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22521 Filed 9-12-12; 8:45 am]
BILLING CODE 8011-01-P