Document ID: SEC-2012-2072-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-12-17T05:00Z

[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74712-74715]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30273]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68404; File No. SR-FINRA-2012-041]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving 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

December 11, 2012.

I. Introduction

    On August 24, 2012, 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 amending the Customer 
and Industry Codes of Arbitration Procedure (collectively, the 
``Codes'') (1) to provide that when FINRA member firms and/or employees 
or associated persons of FINRA members who are parties to an 
arbitration (collectively, ``Member Parties'') seek the appearance of 
witnesses by, or the production of documents from, FINRA members (and 
individuals associated with the member) who are not parties to the 
arbitration (collectively, ``Non-Party Members''), FINRA arbitrators 
shall (unless circumstances dictate otherwise) issue orders for the 
appearance of witnesses or the production of documents, instead of 
issuing subpoenas; (2) to add procedures for any non-party (Non-Party 
Member or otherwise) receiving a subpoena to object to the subpoena; 
(3) to provide that if an arbitrator issues a subpoena to a Non-Party 
Member at the request of a Member Party, the Member Party making the 
request is (unless the panel

[[Page 74713]]

directs otherwise) responsible for paying the reasonable costs of the 
appearance of witnesses by or the production of documents from the Non-
Party Member; (4) to add procedures for any party to an arbitration to 
file a motion requesting arbitrators issue an order for the appearance 
of any employee or associated person of a FINRA member (collectively, 
``Associated Persons'') or the production of documents from such 
Associated Persons or members; (5) to add procedures for any party to 
an arbitration receiving a motion for an order and draft order to 
object to the order; (6) to add procedures for how the party to the 
arbitration that requested the order must serve the order (if issued); 
(7) to add procedures for any Non-Party Member receiving an order to 
object to the order; and (8) to add procedures for how parties to an 
arbitration must share documents received in response to an order 
issued to a Non-Party Member.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on September 13, 2012.\3\ The Commission received three 
comment letters on the proposed rule change from: the Securities 
Arbitration Clinic at St. John's University School of Law \4\; the 
Investor Rights Clinic at Pace Law School \5\; and the Public Investors 
Arbitration Bar Association (``PIABA'').\6\ 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, on the Commission's Web site at 
http://www.sec.gov, and at the Commission's Public Reference Room.
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    \3\ See Exchange Act Release No. 67803 (Sept. 7, 2012), 77 FR 
56694 (Sept. 13, 2012), (``Notice''). The comment period closed on 
October 4, 2012.
    \4\ See Letter from Shane Malone and others, Securities 
Arbitration Clinic, St. John's University School of Law, dated 
September 25, 2012 (the ``St. John's Letter'').
    \5\ See Letter from Jill I. Gross and others, Investor Rights 
Clinic, Pace Law School, dated October 4, 2012 (the ``Pace 
Letter'').
    \6\ See Letter from Ryan K. Bakhtiari, PIABA, dated October 4, 
2012 (the ``PIABA Letter''). See also infra note 21.
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    This order approves the proposed rule change.

II. Description of the Proposed Rule Change

A. Subpoena Rules

    Currently, the Codes authorize arbitrators to issue subpoenas for 
the production of documents or the appearance of witnesses.\7\ Rules 
12512 and 13512 of the Codes (the ``Subpoena Rules'') set forth 
procedures for any party (Member Party or non-member) to an arbitration 
to make a motion for a subpoena. Specifically, the requesting party 
must file a written motion with FINRA's Director of Arbitration 
(``Director'') (with an additional copy for the arbitrator) requesting 
that an arbitrator issue a subpoena to another party to the arbitration 
or to a non-party. The motion must include a draft subpoena and the 
requesting party must serve the motion and draft subpoena on each other 
party to the arbitration at the same time and in the same manner as on 
the Director. The requesting party, however, may not serve the motion 
or draft subpoena on a non-party.\8\
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    \7\ See FINRA Rules 12512(a) and 13512(a).
    \8\ See FINRA Rules 12512(b) and 13512(b).
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    The Subpoena Rules also detail how a party to an arbitration 
receiving a motion and draft subpoena may object to the scope or 
propriety of the subpoena; how the requesting party may reply to 
another party's objection; and how the arbitrator rules on the issuance 
and scope of the subpoena.\9\ If the arbitrator issues a subpoena, 
however, the party that requested the subpoena must serve the subpoena 
at the same time and in the same manner on all other parties to the 
arbitration and, if applicable, on any non-party receiving the 
subpoena.\10\ Finally, the Subpoena Rules describe how parties to an 
arbitration must share any documents they receive in response to a 
subpoena service on a non-party.\11\
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    \9\ See FINRA Rules 12512(c) and 13512(c).
    \10\ See FINRA Rules 12512(d) and 13512(d).
    \11\ See FINRA Rules 12512(e) and 13512(e).
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    The Subpoena Rules do not currently address, however, who bears the 
costs of production under a subpoena issued to either a party to an 
arbitration or a non-party. In the Notice, FINRA states that in 
practice arbitrators resolve disputes between parties to an 
arbitration, as well as between parties and non-parties, relating to 
costs associated with complying with a subpoena. In addition, the 
Subpoena Rules do not currently provide a means for non-parties to 
object to subpoenas served upon them. FINRA states that in practice, 
however, FINRA permits non-parties to file objections to subpoenas. 
And, according to FINRA, in practice the objections may include a 
request for the arbitrators to determine who pays the costs of 
production.
    FINRA filed this proposed rule change, in part, to codify these 
existing practices. FINRA proposes new Rules 12512(e) and 13512(e) to 
the Codes 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 ten (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 the parties to the arbitration (including the 
requesting party). The party that requested the subpoena may respond to 
the objections within ten (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. FINRA stated in its Notice that the proposed amendments 
would codify FINRA's current practice relating to objections.
    In addition, the proposed rule change would add new Rules 12512(g) 
and 13512(g) to the Codes to address costs when a Member Party requests 
a subpoena directed to a Non-Party Member. Specifically, if the 
arbitrators issue a subpoena to a Non-Party Member, the Member Party 
that requested the subpoena shall pay the reasonable appearance and/or 
production costs related to the Non-Party Member's compliance with 
subpoena, unless the panel directs otherwise. If a dispute arises 
regarding who should pay the appearance and/or production costs and 
whether a stated amount is reasonable, the proposed rule change would 
allow arbitrators to determine the reasonable costs and to assess 
responsibility for paying them. FINRA believes that the amendments 
would codify the current practice relating to how FINRA handles such 
disputes. FINRA also believes that the responsibility of a party to an 
arbitration to reimburse a non-party for its appearance and/or 
production costs should be the same regardless of whether the non-party 
is responding to a subpoena or an order requested by the party; to this 
end, new Rules 12512(g) and 13512(g) would also eliminate the current 
disparity between how the Subpoena Rules and the Order Rules (defined 
below), which expressly address who bears the costs of production 
relating to compliance with an order, treat such costs.\12\
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    \12\ See FINRA Rules 12513(b) and 13513(b) (stating that unless 
the panel directs otherwise, the party to the arbitration requesting 
the order for the appearance of witnesses by or the production of 
documents from non-parties under this rule shall (unless the panel 
directs otherwise) pay the reasonable costs related to the 
appearance of witnesses or the production of documents done in 
response to such order).
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B. Order Rules

    Rules 12513 and 13513 of the Codes (the ``Order Rules'') also 
currently

[[Page 74714]]

authorize arbitrators to order the appearance of any Associated Persons 
or the production of documents in the possession or control of an 
Associated Person or a FINRA member (including both parties to an 
arbitration and non-parties) without using the subpoena process.\13\ In 
fact, as stated in the Notice, FINRA believes that parties to an 
arbitration would be better served by requesting an arbitrator order 
instead of a subpoena because orders offer a more efficient mechanism 
for obtaining the appearance of witnesses and production of documents 
from FINRA members and/or their Associated Persons (including both 
parties to an arbitration and non-parties). For instance, FINRA states 
in the Notice that while the Codes provide an enforcement mechanism for 
both subpoenas and arbitrator orders,\14\ typically, once an arbitrator 
issues a subpoena in a dispute, 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. Consequently, FINRA believes that arbitrator orders 
are cost effective for forum users because parties to the arbitration 
and non-parties would avoid the costs and risks associated with court 
proceedings. Moreover, FINRA does not believe that using arbitration 
orders instead of subpoenas in arbitration proceedings would adversely 
impact the ability of parties to an arbitration to obtain documents and 
witnesses at the forum.
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    \13\ See FINRA Rules 12513(a) and 13513(a).
    \14\ 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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    To this end, FINRA proposed adding new Rules 12512(a)(2) and 
13512(a)(2) to the Subpoena Rules to provide that unless circumstances 
dictate the need for a subpoena,\15\ arbitrators shall not issue 
subpoenas to Non-Party Members at the request of Member Parties. 
Specifically, 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 
Non-Party Member under the Order Rules.
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    \15\ For example, an arbitrator might issue a subpoena if 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.
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    With the proposed rules, FINRA also intends to standardize its 
procedures relating to the use of orders and subpoenas in arbitration 
by adding to the Order Rules procedures substantially similar to those 
in the Subpoena Rules. In particular, the proposed rule would add Rules 
12513(b) and 13513(b), setting forth procedures for any party to an 
arbitration to make a motion for an order for the appearance of 
Associated Persons (including both parties to the arbitration and non-
parties) or the production of documents in the possession or control of 
such Associated Persons of FINRA members (including both parties to the 
arbitration and non-parties). Specifically, the requesting party must 
file a written motion with the Director (with an additional copy for 
the arbitrator) requesting that an arbitrator issue the order. The 
motion must include a draft order and the requesting party must serve 
the motion and draft order on each other party to the arbitration at 
the same time and in the same manner as on the Director. The requesting 
party, however, may not serve the motion or draft order on a Non-Party 
Member. These proposed procedures are substantially similar to those 
procedures used by a party to an arbitration to make a motion for a 
subpoena.\16\
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    \16\ See FINRA Rules 12512(b) and 13512(b).
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    The proposed rule would add other provisions substantially similar 
to certain Subpoena Rules. Specifically, new Rules 12513(c) and 
13513(c) would provide a mechanism for a party to an arbitration 
receiving a motion and draft order to object to the scope or propriety 
of the order, as well as a mechanism for the requesting party to reply 
to another party's objection. Under the new provisions, if party 
receiving a motion and draft order objects to the scope or propriety of 
the order, the party shall, within ten (10) calendar days of service of 
the motion, file written objections with the Director (with an 
additional copy for the arbitrator) and serve copies on all other 
parties to the arbitration at the same time and in the same manner as 
on the Director. The party that requested the order may respond to the 
objections within ten (10) calendar days of receipt of the objections. 
After considering all objections, the arbitrator responsible for 
deciding discovery-related motions shall rule promptly on the issuance 
and scope of the order. Again, this proposal is substantially similar 
to the related provisions in the Subpoena Rules detailing how a party 
to an arbitration receiving a motion and draft subpoena may object to 
the scope or propriety of the subpoena; how the requesting party may 
reply to another party's objection; and how the arbitrator rules on the 
issuance and scope of the subpoena.\17\
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    \17\ See supra note 9.
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    In addition, under proposed new Rules 12513(d) and 12513(d), if an 
arbitrator ultimately issues the requested order, the requesting party 
must serve the order at the same time and in the same manner on all 
other parties to the arbitration and, if applicable, on any Non-Party 
Member receiving the order. These proposed new rules also parallel the 
related rules in the Subpoena Rules.\18\
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    \18\ See supra note 10.
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    Moreover, the proposed rules would add new Rules 12513(e) and 
13513(e) to provide a mechanism for Non-Party Members to object to an 
order that an arbitrator issues to them. Under the new provisions, if a 
Non-Party Member receiving an order objects to the scope or propriety 
of the order, the Non-Party Member may, within ten (10) calendar days 
of service of the order, file written objections with the Director. The 
Director shall forward a copy of the written objections to the 
arbitrator and all the parties to the arbitration (including the 
requesting party). The party that requested the order may respond to 
the objections within ten (10) calendar days of receipt of the 
objections. After considering all objections, the arbitrator 
responsible for issuing the order shall rule promptly on the 
objections. These proposed new rules are substantially similar to the 
new rules that that proposal also proposes adding to the Subpoena 
Rules. This would codify FINRA's current practice relating to 
objections.
    Finally, the proposed rule change would add new Rules 12513(f) and 
13513(f), describing how parties to an arbitration must share any 
documents they receive in response to an order served on a non-party 
(i.e., Non-Party Members). Specifically, under the new rules any party 
to an arbitration receiving documents in response to an order served on 
a Non-Party Member shall provide notice to all other parties within 
five (5) days of receipt of the documents. Thereafter, any party to the 
arbitration may request copies of such documents, which must be 
provided within ten (10) calendar days of receipt of such request. 
Again, these proposed new rules parallel the existing related 
provisions in the Subpoena Rules.\19\
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    \19\ See supra note 11.

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[[Page 74715]]

III. Discussion of Comment Letters

    The Commission received three comment letters on the proposed rule 
change in response to the Notice.\20\ All three comment letters 
supported the proposed rule change. The St. John's Letter supported the 
proposed rule change noting that St. John's believes that encouraging 
the use of orders instead of subpoenas would minimize the involvement 
of courts in the arbitration process and, consequently, maximize 
efficiency of the arbitration process. In addition, St. John's believes 
that by codifying existing processes for non-parties to file objections 
to a subpoena, and clarifying the process for determining 
responsibility for fees related to the appearance of witnesses by and 
production of documents from non-parties, the proposal would create 
greater certainty for arbitration participants.
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    \20\ See supra notes 4, 5 and 6.
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    The Pace Letter supported the proposed rule change, also noting 
that encouraging the issuance of orders instead of subpoenas would 
minimize the involvement of litigation in arbitration and consequently 
reduce associated costs and delays. The Pace Letter also noted that the 
proposal would create a unified enforceable process that enhances 
efficiency for resolving disputes.
    The PIABA Letter also supported the proposed rule change because it 
would encourage the use of orders rather than subpoenas for compelling 
the appearance of witnesses by and production of documents from non-
parties. In addition, PIABA favors codifying previously undocumented 
processes and making consistent arbitration procedures governing the 
use of orders and subpoenas.\21\
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    \21\ In a telephone conversation on October 22, 2012, among 
Margo Hassan, Ken Adrichik and Linda Fienberg of FINRA, Ryan 
Bakhtiari of PIABA, and Leila Bham of the Commission, PIABA 
confirmed that the entirety of the last paragraph of the PIABA 
Letter should be disregarded and considered deleted. This last 
paragraph had expressed concern over FINRA rules regarding 
allocation of costs in connection with the use of subpoenas and 
orders in FINRA arbitration. As a result, the PIABA Letter is 
considered in its entirety to be supportive of the proposed rule 
change.
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IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
the comments received. Based on its review, the Commission finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association. In particular, the Commission finds that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\22\ 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.
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    \22\ 15 U.S.C. 78o-3(b)(6).
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    More specifically, the Commission believes that the proposed 
amendments would encourage the use of orders instead of subpoenas in 
arbitration, codify certain existing processes, and standardize other 
procedures relating to subpoenas and arbitrator orders. In particular, 
the Commission believes that the use of orders in the first instance 
instead of subpoenas, with respect to compelling the appearance of 
witnesses and production of documents, could lower discovery costs. The 
Commission also believes that by codifying existing processes and 
eliminating the disparity between the Subpoena Rules and the Order 
Rules, the proposed rule will eliminate potential confusion over the 
applicability of certain provisions of the Codes and, consequently, 
enhance the efficiency of the arbitration process for its users.
    The Commission has reviewed the record for the proposed rule change 
and believes that the record does not contain any information to 
indicate that the proposed rule would have a significant effect on 
efficiency, competition, or capital formation. In light of the record, 
the Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation and has concluded that the proposed 
rule is unlikely to have any significant effect.\23\
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    \23\ See 15 U.S.C. 78c(f).
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    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 Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-FINRA-2012-041) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-30273 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P