Document ID: SEC-2019-0108-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-02-12T05:00Z

[Federal Register Volume 84, Number 29 (Tuesday, February 12, 2019)]
[Notices]
[Pages 3518-3521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01946]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85063; File No. SR-FINRA-2019-004]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Expand 
Time for Non-Parties To Respond to Arbitration Subpoenas and Orders of 
Appearance of Witnesses or Production of Documents

February 6, 2019.
    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 January 29, 2019, 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 FINRA Rule 12512(d) through (e) and 
FINRA Rule 12513(d) through (e) of the Code of Arbitration Procedure 
for Customer Disputes (``Customer Code'') and FINRA Rule 13512(d) 
through (e) and FINRA Rule 13513(d) through (e) of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'' and 
together, ``Codes''), to expand time for non-parties to respond to 
arbitration subpoenas and orders of appearance of witnesses or 
production of documents, and to make related changes to enhance the 
discovery process for forum users.
    The text of the proposed rule change is available at the principal 
office of FINRA, on FINRA's website at http://www.finra.org, 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
Introduction
    The proposed rule change would amend FINRA Rules 12512, 12513, 
13512 and 13513 that govern procedures for non-parties to object to 
subpoenas and for non-parties to object to arbitrator orders of 
appearance of witnesses or production of documents. The proposed rule 
change would help ensure that non-parties wanting to object to an order 
or subpoena have sufficient time to do so. The proposal will also make 
related changes to enhance the discovery process for forum users.
Background
    In arbitration, the parties exchange documents and information to 
prepare for the arbitration through the discovery process. The Codes 
currently provide that parties in FINRA arbitration who seek discovery 
from a non-party may request the panel to issue: (1) An order of 
appearance of witnesses or production of documents if the non-party is 
subject to FINRA's jurisdiction as an associated person or member firm 
or (2) a subpoena if the non-party is not subject to FINRA's 
jurisdiction.\3\ If the panel decides to issue the order or subpoena, 
FINRA will transmit the signed order or subpoena to the moving party to 
serve on the non-party. If a non-party receiving an order or a subpoena 
objects to the scope or propriety of the order or subpoena, the non-
party may, within 10 calendar days of service of the order or subpoena, 
file written objections through the Director of the Office of Dispute 
Resolution (Director).
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    \3\ See Rules 12512 and 12513. See also Rules 13512 and 13513.
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Concerns About Current Subpoena and Order Rules for Non-Parties
    Forum users have raised concerns that the amount of time that non-
parties have to respond to orders and subpoenas is insufficient.\4\ 
Since non-

[[Page 3519]]

parties do not have access to the Dispute Resolution Party Portal 
(Party Portal),\5\ they are currently served using other means (first-
class mail, overnight mail service, overnight delivery service, hand 
delivery, email or facsimile). Recipients of orders and subpoenas 
reported that the individual at a non-party firm who is responsible for 
responding to an order or subpoena (e.g., legal staff) may not actually 
receive a copy of the order or subpoena through internal processes 
until after the tenth day from service has passed, thereby causing the 
non-party firm to risk waiving its ability to timely object to the 
order or subpoena.\6\ As a non-party to the arbitration, a firm is not 
able to anticipate the arrival of an order or subpoena and instruct 
front line employees (e.g., receptionists or mail room personnel) to 
route these high priority documents to the appropriate individual 
responsible for responding to the discovery request. Once the objection 
to an order or subpoena is waived, the non-party must respond to the 
order or subpoena or risk incurring sanctions or disciplinary 
action.\7\ Forum users have also raised concerns that the use of first-
class mail is not an ideal option in discovery because it is slow. For 
these reasons, FINRA seeks to offer sufficient time for non-parties to 
provide the order or subpoena to the appropriate individual who would 
respond to the discovery request.
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    \4\ See, e.g., Letter from Kevin M. Carroll, Managing Director 
and Associate General Counsel, Securities Industry and Financial 
Markets Association, to Jennifer Piorko Mitchell, Vice President and 
Deputy Corporate Secretary, FINRA, dated June 2, 2017 (responding to 
FINRA's March 2017 Special Notice on FINRA's engagement programs), 
www.finra.org/sites/default/files/notice_comment_file_ref/SN-32117_SIFMA-KevinCarroll_comment.pdf.
    \5\ The Party Portal provides arbitration forum users with a 
secure, online location for claim filing and interactions relating 
to case administration. Parties use the Party Portal to, among other 
things, file claims, pay filing fees, receive documents from and 
send documents to FINRA, receive service of claims, submit answers 
to claims, submit additional case documents, view the status of 
cases, select arbitrators, schedule hearings and send documents to 
other Party Portal case participants.
    \6\ See supra note 4.
    \7\ See Rules 12212 and 12511. See also Rules 13212 and 13511.
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Proposed Rule Change
    FINRA is proposing three amendments to the Codes to enhance the 
discovery process for forum users, particularly non-parties. First, 
FINRA is proposing to amend the Codes to extend the response time for 
non-parties to object to an order or subpoena from 10 calendar days of 
service to 15 calendar days of receipt of the order or subpoena. 
Receipt of overnight mail service, overnight delivery service, hand 
delivery, email or facsimile is accomplished on the date of delivery. 
FINRA believes that the proposed rule change would address forum users' 
concerns because the proposal would help ensure that non-parties 
wanting to object to an order or subpoena have sufficient time to do 
so.
    Second, FINRA is proposing to amend the Codes to exclude first-
class mail as an option to serve documents on the non-party and as an 
option for the non-party to file the objection to the scope or 
propriety of the order or subpoena.\8\ FINRA believes that by requiring 
forum users to serve or transmit discovery-related documents through 
overnight mail service, overnight delivery, hand delivery, email or 
facsimile, forum users are better able to confirm and facilitate the 
timing of discovery obligations.
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    \8\ Filing and service by first-class mail is accomplished on 
the date of mailing, but it can take several days to confirm 
receipt. For purposes of this rule proposal, service by overnight 
mail, overnight delivery, hand delivery, facsimile or email is 
accomplished on the date of delivery.
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    Third, FINRA is proposing to amend the Codes to codify the current 
practice that the Director sends, at the same time, objections and 
responses to the panel after the reply date has elapsed, unless 
otherwise directed by the panel. The Director sends the complete set of 
motion papers to the panel to ensure that the panel receives the 
advocacy positions of all parties at the same time. FINRA believes that 
the proposed rule change will enhance forum users' understanding of 
existing case administration procedures and will improve transparency 
concerning forum operations.\9\
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    \9\ FINRA notes that the proposed rule change would impact all 
members, including members that are funding portals or have elected 
to be treated as capital acquisition brokers (``CABs''), given that 
the funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
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    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 30 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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 
enhance the discovery process for forum users by giving non-parties 
additional time to respond to subpoenas and orders. Further, the 
proposed rule change addresses forum users' concerns on delays with 
first-class mail and would enhance their ability to confirm and 
facilitate the timing of discovery obligations. FINRA further believes 
that the proposed amendments would also enhance the user experience at 
the forum by standardizing certain procedures relating to subpoenas and 
orders and will improve transparency concerning forum operations.
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    \10\ 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. A discussion of the economic 
impacts of the proposed rule change follows.
Economic Impact Assessment
    FINRA staff has undertaken an economic impact assessment, as set 
forth below, to analyze the regulatory need for the proposed rule 
change, its potential economic impacts, including anticipated costs, 
benefits, and distributional and competitive effects, relative to the 
current baseline, and the alternatives FINRA considered in assessing 
how to best meet its regulatory objectives.
(a) Regulatory Need
    Under the Codes, non-parties to an arbitration have a limited 
amount of time to object to an order or subpoena. Parties and non-
parties may also use options to transmit or serve documents that are 
slow, further hindering the ability of non-parties to timely 
object.\11\ This could cause non-parties to inadvertently waive their 
ability to timely object. Non-parties for whom the objection process 
would be valuable could incur costs associated with this outcome.
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    \11\ See supra note 7.
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(b) Economic Baseline
    The economic baseline for the proposed amendments are the Codes 
that address the length of time for non-parties to respond to 
arbitrators' orders and subpoenas. The economic baseline also includes 
the Codes that address the options for parties and non-parties to serve 
or transmit documents. The proposal is expected to affect non-parties 
and parties to an arbitration.
    Although FINRA does collect information describing orders and 
subpoenas, FINRA does not collect information specifically identifying 
orders or subpoenas to non-parties. The

[[Page 3520]]

frequency in which parties currently request arbitrators to issue 
orders or subpoenas to non-parties, and whether non-parties respond or 
object, is therefore not available. Information is also not available 
to describe the frequency in which non-parties inadvertently waive 
their ability to timely object to an order or subpoena.
(c) Economic Impact
    The proposed amendments would extend the response time for non-
parties to object to an order or subpoena. The proposed amendments 
would also exclude first-class mail as an option to transmit or serve 
documents. The benefits and costs of the proposed amendments are 
discussed below.
    The proposed amendments may benefit non-parties when responding to 
orders and subpoenas. The proposed amendments would increase the amount 
of time for non-parties to formulate sound objections and file these 
objections with the Director and requesting party. Further, non-parties 
that are able to timely object as a result of the proposed amendments, 
and that receive a ruling in their favor, would not incur the costs 
associated with the release of proprietary or non-public 
information.\12\
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    \12\ See supra note 4. The letter notes the potential release of 
``proprietary, competitively-sensitive, or non-public personal 
information'' as a result of the inability of non-parties to timely 
object to an order or subpoena. Non-parties would also not incur the 
costs to appear as a witness or to produce documents that are in 
excess of the reasonable amount paid as reimbursement by the 
requesting party.
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    The proposed amendments, however, may impose costs on requesting 
parties. Non-parties that are able to timely object as a result of the 
proposed amendments, and that receive a ruling in their favor, would 
not appear as a witness or produce documents. Requesting parties that 
would otherwise receive the information may be less able to present a 
case in arbitration and receive an award in their favor. This potential 
cost, however, is dependent on whether the information would have 
affected the arbitrators' award decision.\13\
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    \13\ If arbitrators rule in favor of non-parties with respect to 
the scope or propriety of the order or subpoena, then the 
information would not likely increase the ability of the requesting 
parties to present a case in arbitration and receive an award in 
their favor. Requesting parties, however, would not incur the costs 
of non-parties to appear as a witness or to produce documents.
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    The proposed amendments may have countervailing effects on the 
efficiency of the arbitration forum. The increase in the amount of time 
for non-parties to respond may lengthen the discovery phase of the 
arbitration proceedings, and therefore the amount of time until the 
resolution of the dispute. The exclusion of first-class mail as an 
option to transmit or serve documents, however, may increase the speed 
of delivery as well as the ability of parties to determine the sequence 
and timing of discovery. Whether the forum becomes more or less 
efficient as a result of the proposed amendments is dependent on the 
number of additional days non-parties take to file an objection to an 
order or subpoena, as well as the extent to which parties and non-
parties transition to more efficient means of communication.
    The proposed amendments may also have additional economic impacts. 
For example, the exclusion of first-class mail may impose additional 
costs on parties and non-parties that transition to a different, more-
expensive option to transmit or serve documents. The proposed 
amendments would also codify the current practice whereby FINRA holds 
all documents from objections and responses to orders or subpoenas 
before sending them at one time after the reply date has elapsed 
(unless otherwise directed by the panel). FINRA does not believe, 
however, that any economic impact from the clarification of procedures 
would be material.
(d) Alternatives Considered
    The alternatives considered to the proposed amendments include not 
extending the response time for non-parties to object to an order or 
subpoena, or extending the response time but for a different number of 
days. Other alternatives considered include not excluding first-class 
mail as an option for transmitting or serving documents, or excluding 
different options.
    FINRA considered the benefits to non-parties from extending the 
response time to object to an order or subpoena with the potential 
increase in the amount of time for discovery. FINRA also considered the 
benefits from excluding options to transmit or serve documents with the 
costs of reducing the number of options. FINRA believes that the 
proposed amendments increase the ability of non-parties to timely 
object to an order or subpoena, as well as the efficiency of the 
discovery process, while minimizing the potential costs to parties and 
non-parties.

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-2019-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2019-004. 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 website (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 website 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

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filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2019-004 
and should be submitted on or before March 5, 2019.

     For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01946 Filed 2-11-19; 8:45 am]
 BILLING CODE 8011-01-P