[Federal Register Volume 78, Number 119 (Thursday, June 20, 2013)]
[Notices]
[Pages 37261-37265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14683]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69761; File No. SR-FINRA-2013-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amendments to the Discovery Guide Used in Customer Arbitration
Proceedings
June 13, 2013.
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 June 3, 2013, 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 substantially prepared by
FINRA. The Commission is publishing this notice to
[[Page 37262]]
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 Discovery Guide (``Guide'') used in
customer arbitration proceedings to provide general guidance on
electronic discovery (``e-discovery'') issues and product cases and to
clarify the existing provision relating to affirmations made when a
party does not produce documents specified in the Guide. The proposed
rule change fulfills FINRA's commitment to review the topics of e-
discovery and product cases with the Discovery Task Force (``Task
Force'') that FINRA established in 2011.\3\ FINRA believes that the
proposed revisions to the Guide will reduce the number and limit the
scope of disputes involving document production in customer cases,
thereby improving the arbitration process for the benefit of public
investors, broker-dealer firms, and associated persons.
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\3\ In 2011, FINRA received SEC approval to update the Guide
(See Securities Exchange Act Rel. No. 64166 (April 1, 2011), 76
Federal Register 19155 (April 6, 2011), File No. SR-FINRA-2010-035).
As part of the rule making process, FINRA agreed to establish the
Task Force under the auspices of the National Arbitration and
Mediation Committee (NAMC). FINRA charged the Task Force with
reviewing substantive issues relating to the Guide on a periodic
basis to keep the Guide current as products change and new discovery
issues arise. FINRA pledged to ask the Task Force to review e-
discovery issues and product cases.
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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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Guide supplements the discovery rules contained in the FINRA
Code of Arbitration Procedure for Customer Disputes (``Customer
Code''). It includes an introduction which describes the discovery
process generally, and explains how arbitrators should apply the Guide
in arbitration proceedings. The introduction is followed by two
Document Production Lists (Lists), one for firms/associated persons,
and one for customers, which enumerate the documents that parties
should exchange without arbitrator or staff intervention. The Guide
only applies to customer arbitration proceedings, not to intra-industry
cases.
As stated above, in 2011 FINRA updated the Guide and established
the Task Force. To fulfill the commitment FINRA made to the SEC during
the rulemaking process, the first topics that the Task Force discussed
were e-discovery and product cases. The Task Force also reviewed
concerns raised by forum users about the affirmation language in the
Guide's introduction.
E-Discovery
FINRA considers electronic files to be documents within the meaning
of the Guide. As part of the 2011 revisions, FINRA updated the Guide to
expressly state that electronic files are documents within the meaning
of the Guide and that arbitrators decide any disputes that arise about
the form in which a party produces a document. Commenters on the
proposed rule change asked FINRA for additional guidance on e-
discovery. The Task Force discussed e-discovery over numerous meetings
and recommended that FINRA amend the Guide to include general
guidelines for arbitrators to consider when deciding disputes relating
to the form of production for electronic documents.
FINRA is proposing to amend the Guide's introduction to state that
parties are encouraged to discuss the form in which they intend to
produce documents and, whenever possible, to agree to the form of
production. The provision would require parties to produce electronic
files in a ``reasonably usable format.'' The term reasonably usable
format would refer, generally, to the format in which a party
ordinarily maintains a document, or to a converted format that does not
make it more difficult or burdensome for the requesting party to use
during a proceeding.
The proposed guidance would also state that when arbitrators are
resolving contested motions about the form of document production, they
should consider the totality of the circumstances, including:
For documents in a party's possession or custody, whether
the chosen form of production is different from the form in which a
document is ordinarily maintained;
For documents that must be obtained from a third party
(because they are not in a party's possession or custody), whether the
chosen form of production is different from the form in which the third
party provided it; and
For documents converted from their original format, a
party's reasons for choosing a particular form of production; how the
documents may have been affected by the conversion to a new format; and
whether the requesting party's ability to use the documents is
diminished by any change in the documents' appearance, searchability,
metadata, or maneuverability.
The third factor would advise arbitrators to consider, among other
things, whether a party's ability to use a converted document is
diminished by a change in the documents' appearance, searchability,
metadata, or maneuverability. If the SEC approves the proposed rule
change, FINRA intends to provide arbitrators with guidance on the terms
``appearance,'' ``searchability,'' ``metadata,'' and
``maneuverability'' in training materials to be posted on FINRA's Web
site. FINRA would include the substance of the following descriptions
of each term in the training materials:
Appearance--In many instances, converting a document from
its ``native format'' (the form in which the electronic file was
created) to a hard copy or static format will not affect the appearance
of the document. However, that is not always the case. If, for example,
a party prints a Microsoft Word[supreg] document (``Word document'')
and produces it in hard copy, it will look the same. However, a party
might configure some native files to print only certain portions of the
document. For example, a party could set the print area on a Microsoft
Excel[supreg] spreadsheet (``Excel spreadsheet'') to print only certain
rows or columns. A hard copy print-out of such an Excel spreadsheet
would contain less information than the native file. Similarly, a hard
copy print-out of a Microsoft PowerPoint[supreg] presentation may not
contain speaker's notes that appear in the electronic file.
[[Page 37263]]
Searchability--Converting a native file may affect the
searchability of the document. If a party prints a Word document and
produces it in hard copy form, the document is not electronically
searchable. In its native form, the contents of a Word document can be
searched electronically for key words or information. Static electronic
formats may or may not be searchable, depending on how they are
converted.
Metadata--Converting a native file may also affect the
availability of metadata. Metadata describes how, when, and by whom
electronically stored information (``ESI'') was collected, created,
accessed, or modified, and how it is formatted. For example, an email
contains many pieces of metadata, such as the date and time it was
sent, and information about who sent it, and who received it. It is
possible to convert a native file to a static format and keep all the
metadata attached. It is also possible to produce some, but not all,
metadata associated with a native file.
Maneuverability--Converting a native file into another
format may affect the maneuverability of a document--the party's
ability to manipulate data using the native application. For example,
an Excel spreadsheet in its native format can be sorted and filtered
for data and the user can examine embedded formulas and references. If
the Excel spreadsheet is printed or converted to certain formats, that
ability is lost.
FINRA recognizes that parties have legitimate reasons for
converting documents into different formats, and for requesting
particular document formats. For example, a firm may need to convert a
document into a particular format to comply with legal requirements to
redact personal confidential information, such as customer Social
Security numbers. A customer may need a document to contain metadata in
order to establish when a broker learned specific information. FINRA
believes that requiring production in a reasonably usable format and
providing general guidance on e-discovery would provide arbitrators
with the flexibility to tailor document production to the needs of each
case.
In conjunction with the proposed guidance on e-discovery, FINRA is
proposing to amend the Guide's discussion on cost or burden of
production. Currently, the Guide states that if the arbitrators
determine that the document is relevant or likely to lead to relevant
evidence, they should consider whether there are alternatives that can
lessen the cost or burden impact, such as narrowing the time frame or
scope of an item on the Lists, or determining whether another document
can provide the same information. FINRA is mindful of the costs
associated with e-discovery and is proposing to amend the cost or
burden of production provision to advise arbitrators that they may
order a different form of production if it would lessen the cost or
burden impact of producing electronic documents. FINRA believes the
additional guidance would raise arbitrator awareness of alternative
ways to help parties to resolve an e-discovery dispute in a cost
effective manner.
Product Cases
In its 2011 order approving revisions to the Guide, the SEC noted
that several commenters raised concerns that the revised Guide does not
sufficiently address product cases, as described below.\4\ In response
to these concerns, FINRA agreed to ask the Task Force to consider the
topic. The Task Force recognized that product cases are unique customer
cases that differ from other customer cases in several ways and
recommended that FINRA add general guidelines to the Guide which
describe how product cases are different from other customer cases and
which outline the types of documents that parties typically request in
such cases.
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\4\ Supra Note 3.
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FINRA is proposing to amend the Guide's introduction to add
guidance on product cases. The Guide would state that a product case is
one in which one or more of the asserted claims centers around
allegations regarding the widespread mismarketing or defective
development of a specific security or specific group of securities. The
Guide would enumerate some of the ways that product cases are different
from other customer cases, including that:
The volume of documents tends to be much greater;
Multiple investor claimants may seek the same documents;
The documents are not client specific;
The product at issue is more likely to be the subject of a
regulatory investigation;
The cases are more likely to involve a class action with
documents subject to a mandatory hold; \5\
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\5\ A mandatory hold is an act by an entity to preserve
documents and electronic information relevant to a lawsuit or
government investigation.
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The same documents may have been produced to multiple
parties in other cases involving the same security or to regulators;
and
Documents are more likely to relate to due diligence
analyses performed by persons who did not handle the claimant's
account.
The Guide would explain that the two existing Lists may not provide
all of the documents parties typically request in a product case
relating to, among other things, a firm's: Creation of a product; due
diligence reviews of a product; training on or marketing of a product;
or post-approval review of a product. The text would emphasize that, in
a product case, parties are not limited to the documents enumerated in
the Lists. It would also emphasize that the Customer Code provides a
mechanism for parties to seek additional documents. Finally, the Guide
would explain that parties do not always agree on whether a case is a
product case, and the arbitrators may ask the parties to explain their
rationale for asserting that a case is, or is not, a product case.
FINRA staff considered adding an item to the firm/associated person
List that would enumerate specific documents that firms/associated
persons would be required to produce when a customer alleged that a
claim was a product case. Staff was mindful of the economic impact on
firms that is associated with the larger volume of documents in product
cases and rejected that approach. Instead, FINRA is proposing general
guidelines on the types of documents that customers typically request
in products cases because general guidelines would encourage parties to
discuss their discovery needs and would encourage arbitrators to be
flexible when making a determination on whether to order additional
production.
Affirmations
The Guide provides for affirmations when a party indicates that
there are no responsive documents in the party's possession, custody,
or control. The affirmation language provides that, upon the request of
a party seeking documents, the customer, or appropriate person at the
firm who has knowledge, must state that the party conducted a good
faith search for the documents, describe the extent of the search, and
state that based on the search there are no requested documents. Forum
users raised concerns that the language creates a ``loop hole'' in
which parties might assert that they are only required to provide an
affirmation relating to production when no documents are produced, as
opposed to situations where there is partial production. Some users
were also concerned that parties might affirm that they did not find
documents where they looked as opposed to looking for documents in all
appropriate places. The Task Force
[[Page 37264]]
discussed the forum users' concerns and recommended that FINRA amend
the affirmation language to add clarity to the provision.
To respond to these concerns, FINRA is proposing to amend the
affirmation language to make it clear that a party may request an
affirmation when an opposing party makes only a partial production. The
revised language would provide that, if a party does not produce a
document specified in the Document Production Lists, upon the request
of the party seeking the document that was not produced, the customer
or the appropriate person at the brokerage firm who has knowledge must
affirm in writing that the party conducted a good faith search for the
requested document. FINRA is also proposing to require a party to state
the sources searched in the affirmation. FINRA believes the proposed
revision would add clarity to the affirmation text and reduce disputes
over requests for affirmations.
Clarifying Amendments
FINRA is proposing to add additional sub-headings to the Guide's
introduction to break the introduction into distinct sections that
address specific concerns. The new headings would be: Flexibility in
Discovery; Cost or Burden of Production; Requests for Additional
Documents; Form of Production; and Product Cases. FINRA believes the
new headings will add clarity to the Guide.
FINRA is proposing to move the sentence that reads: ``[w]here
additional documents are relevant in a particular case, parties can
seek them in accordance with the time frames provided in the 12500
series of rules'' to the section that would be titled Requests for
Additional Documents. FINRA also proposes to add the phrase ``may be''
before relevant to reflect that relevancy is not always established at
the time that a party requests additional documents. Finally, FINRA
proposes to amend the sentence in that paragraph that states that
``[a]rbitrators must use their judgment in considering requests for
additional documents and may not deny document requests on the grounds
that the documents are not expressly listed in the Discovery Guide'' to
add the term ``solely'' before the phrase ``on the grounds.'' FINRA
believes that adding ``solely'' adds clarity to the Guide by ensuring
that arbitrators understand that they should not automatically sustain
an objection to production because a document is not expressly listed
in the Guide.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\6\ 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 will
reduce the number and limit the scope of disputes involving document
production in customer cases, thereby improving the arbitration process
for the benefit of public investors, broker-dealer firms, and
associated persons.
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\6\ 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. FINRA considered the potential
impact of the proposed rule change on efficiency, competition, and
capital formation. FINRA is concerned that production relating to e-
discovery and product cases can be time-consuming and costly for
parties. The proposed revisions to the Guide would provide parties and
arbitrators with guidance on how to handle e-discovery matters and
document production relating to product cases in a flexible, efficient,
and cost effective manner. The proposal would also clarify the
provisions relating to affirmations and should reduce the inefficiency
associated with disputes concerning affirmations.
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 [email protected]. Please include
File Number SR-FINRA-2013-024 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-2013-024. 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
10:00 a.m. and 3:00 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-2013-024 and should be
submitted on or before July 11, 2013.
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-14683 Filed 6-19-13; 8:45 am]
BILLING CODE 8011-01-P