Written by Nancy Campanozzi, Esq.
On July 12, 2010, FINRA filed the Notice of Proposed Rule Change Amendments to the Discovery Guide and Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer Disputes with the SEC.
The Amendments to the Discovery Guide, (Guide) proposes to replace the 14 current Lists of “presumptively discoverable documents” with two lists.
The Guide’s Introduction would be revised to expand the guidance given to parties and arbitrators on the discovery process generally and provide clarification as to how arbitrators should apply the Guide in arbitration proceedings. In addition to the section of the Introduction that states that arbitrators can order parties to produce documents that are not on the lists or alter the parties’ production schedule, the proposed rule would add flexibility to the arbitrators by enabling them to order that parties do not have to produce certain documents.
The revised Introduction would also provide guidance for arbitrators on how to handle objections to discovery requests based on cost or burden of production in order to balance the parties’ discovery needs while keeping the arbitration process moving and reducing costs. For example, if a party demonstrates that the cost or burden of production outweighs the need for the document then the proposed rule change would enable the arbitrator to determine the relevance of the document or likelihood that the document could lead to relevant evidence. If the arbitrator finds that the document is relevant or could lead to relevant evidence then alternatives should be considered to alleviate the burden of production such as narrowing the scope and time frame applicable to an item and also consideration should be given to other documents that could yield the same evidence but are less burdensome to produce.
In an effort to increase parties’ and arbitrators’ awareness of how the differences in business models that exist among the firms involved play into the discovery process, the Introduction would be revised under the proposed rule to take the differences into account by recognizing that some items on a list may not be relevant in a particular case depending on the type of firm. The proposed changes would also expand the discussion of confidentiality in the Guide by explaining that the burden is on the party asserting confidentiality to establish the need for confidential treatment and will enumerate a list of factors for arbitrators to consider when determining if a document should be afforded such treatment. Additionally, the proposed changes would clarify the Guide by explaining which documents the parties are required to produce. Currently, a party making a document request may request the responding party to provide an affirmation stating that the requested document does not exist. The proposed change would delete the word “exist” and replace it with reference to documents “in the parties’ possession, custody, or control.” The revision also seeks to emphasize that parties are not required to create documents in response to items on the lists that are not already in the parties’ possession, custody, or control.
The changes are directed at tailoring the documents that firms/associated persons are required to produce, so that more relevant evidence showing supervision and management over the claimants’ accounts becomes discoverable along with a more complete picture of the strategies involved and a broader picture of compensation received. The nature of the claim would no longer determine production. The changes also serve to narrow the scope of documents to be produced, in order to control the cost of the discovery process in arbitration. For example, production of account statements and confirmations (see current List 2 Item 4) would no longer be required pursuant to the revisions if claimants stipulate to having received them. The revised Guide would also eliminate the requirement that claimants produce all documents that show efforts to limit losses relating to the transactions at issue because firms/associated persons are likely to already possess this information. The documents could still be requested if necessary.
Required production by claimants under the revised guide would be expanded in order to provide a more complete picture of the claimants’ financial worth and activity for the time period relevant to the claim. For example, in addition to production of federal income tax returns, limited to pages 1 and 2 of Form 1040, Schedules B, D, and E, or the equivalent for any other type of return, for the three years prior to the first transaction at issue in the Statement of Claim through the date the Statement of Claim was filed (see current List 2, Item 1), claimants would also be required to produce Form 1040 schedule A and the IRS worksheets related to Schedules A, B, D, and E. The revised Guide would also contain an addition requiring claimants to disclose participation in a confidential settlement agreement if by its terms the agreement does not preclude disclosure. This change to the Guide would not make the documents related to a confidential settlement agreement presumptively discoverable but would acknowledge that the arbitrators could order claimants to produce the agreement. Another new addition in the revised Guide would be a requirement for Claimants to produce all insurance information received from an insurance sales agent or securities broker relating to the insurance for claims involving an insurance product that contains a death benefit.
FINRA made a similar proposal in 2008 in an attempt to revise the guide but it was withdrawn. The current proposal takes into account comments and recommendations from the National Arbitration and Mediation Committee (“NAMC”), a FINRA advisory committee.
You may submit comments regarding the proposal here.
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