[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74712-74715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30273]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\7\ See FINRA Rules 12512(a) and 13512(a).
\8\ See FINRA Rules 12512(b) and 13512(b).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\16\ See FINRA Rules 12512(b) and 13512(b).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\17\ See supra note 9.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\18\ See supra note 10.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\19\ See supra note 11.
---------------------------------------------------------------------------
[[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.
---------------------------------------------------------------------------
\20\ See supra notes 4, 5 and 6.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\23\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------
\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-30273 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P