[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Notices]
[Pages 56694-56697]
From the Federal Register Online via the Government Publishing 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 [email protected]. 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