FINRA’s Discovery Guide for Customer Arbitration Proceedings: Amendments Effective December 2nd

The Financial Industry Regulatory Authority (FINRA) has issued Regulatory Notice 13-40, announcing an effective date of December 2, 2013 for certain SEC-approved amendments to the guide that supplements the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes (FINRA Customer Code). The amended guide, which will apply to all customer cases filed on or after the effective date of December 2, 2013,  provides for more efficient electronic discovery (e-discovery), an expansive production in product cases, and broader grounds to request an affirmation.

The amendments provide parties and arbitrators with general guidance in three main areas: e-discovery, product cases, and affirmations.

Regarding e-discovery, FINRA will now allow arbitrators to order different forms of document production for the reduction of costs or burdens of production, in addition to the already-existing methods of narrowing time frame and scope, and determining alternative, substitute documents. FINRA’s amendments also encourage parties to discuss and agree to the form of document production, e.g. paper or electronic, and require parties to produce electronic files in a “reasonably usable format.” A reasonably usable format refers “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 in connection with the arbitration.” Further, the amended guide urges arbitrators to resolve disputes over the form of document production under a “totality of the circumstances” framework, which lists several factors.

Second, FINRA’s amendments include a new section on product cases, which ultimately creates a wide breadth of discoverable documents for these types of cases. A product case, FINRA specifies, is “one in which one or more of the asserted claims center around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities,” and differs from other customer cases in various enumerated ways. The amended guide also provides that parties disagreeing on whether a case is a product case may ask arbitrators to determine the issue, and arbitrators in turn may ask the parties to explain their rationales.

Finally, FINRA’s amended guide addresses affirmation pertaining to the non-production of documents. The amendments introduce affirmation for partial document production. While the guide previously addressed affirmation for the complete lack of responsive documents, FINRA has amended the guide to provide that a party may request an affirmation when the other party does not produce any applicable document specified in the guide, i.e., upon partial production. Following the request of the party seeking the document, the opposing party “must affirm in writing that the party conducted a good faith search for the requested document,” state the sources searched, and state that the party does not have the requested document.
 
- Cynthia Galvez, CPR Legal Intern