«SECURITIES AND EXCHANGE COMMISSION (Release No. 34-59534; File No. SR-FINRA-2008-024) March 6, 2009 Self-Regulatory Organizations; Financial Industry ...»
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-59534; File No. SR-FINRA-2008-024)
March 6, 2009
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of
Proposed Rule Change and Amendment No. 1 Thereto Relating to Amendments to the Discovery
Guide to Update the Document Production Lists
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 11, 2008, Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)) filed with the Securities and Exchange Commission (“SEC” or “Commission”) and amended by Amendment No. 1 on January 21, 2009,3 the proposed rule change as described in Items I, II, and III below, which Items substantially have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA proposes to amend the Discovery Guide to update the Document Production Lists. The text of the proposed rule change is available at FINRA, at its Web site (http://www.finra.org), 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 1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 Amendment No. 1 to SR-FINRA-2008-024 replaced and superseded the original rule filing.
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 The proposed rule change adds clarifying and conforming language to the introduction in the Discovery Guide and updates the Document Production Lists. The text of the proposed rule change is contained in Exhibit 5 and is available on the FINRA website at www.finra.org.
Background In January 1996, the Arbitration Policy Task Force chaired by former SEC chairman David Ruder issued a document entitled, “Securities Arbitration Reform: Report of the Arbitration Policy Task Force to the Board of Governors of NASD” (the “Report”). The Report made a number of broad recommendations to the Board of Governors to improve the securities arbitration process. One of the recommendations states that: “Automatic production of essential documents should be required for all parties, and arbitrators should play a much greater role in directing discovery and resolving discovery disputes.” After the work of the Task Force was completed, several groups were formed to work on discovery issues in response to this recommendation. Each group was composed of persons offering diverse perspectives, including counsel for investors and industry parties, and all made a substantial contribution to the process.
The outcome of this process was the Discovery Guide, which the SEC approved after a public comment period,4 and was made available for use in arbitration proceedings involving customer disputes upon the publication of NASD Notice to Members (“NTM”) 99-90 (November 1999).
4 See Exchange Act Release No. 41833 (Sept. 2, 1999), 64 FR 49256 (Sept. 10, 1999).
2 In March 2004, after more than four years of use, FINRA5 determined to review the Discovery Guide and consider whether it should be updated. This review was undertaken by FINRA’s National Arbitration and Mediation Committee (“NAMC”), a majority public committee of the FINRA Board made up of attorneys who represent investors, attorneys who represent brokerage firms, arbitrators, and mediators. In addition, FINRA staff met with frequent users of the arbitration forum representing both the public and the industry to listen to concerns regarding the Discovery Guide’s document production lists, proposals for changes, and reactions to other constituents’ proposals. Many of the provisions of the Discovery Guide were incorporated into a major revision of the portion of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”), which was submitted to the SEC in 2003 and approved by the SEC in 2007.6 The remaining provisions in the Discovery Guide consist primarily of lists of documents that are presumptively discoverable (“Document Production Lists”).7 Summary of Significant Changes The proposed rule change adds clarifying and conforming language to the introduction in the Discovery Guide and updates the Document Production Lists.
In the introductory language, FINRA proposes to add, “Where additional information is relevant in a particular case, it can be sought in accordance with the time frames provided in the 5 On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend NASD’s Certificate of Incorporation to reflect its name change to FINRA in connection with the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007).
6 Exchange Act Release No. 55158 (Jan. 24, 2007), 72 FR 4574 (Jan. 31, 2007) (File No. SR-NASD-2003-158).
3 12500 series of rules.” This is intended to clarify that the Document Production Lists are not exhaustive, and that other documents may be requested. FINRA is also proposing to replace the reference to “churning” with the term “excessive trading” to conform the introduction to the language used in the Document Production Lists. FINRA also proposes to add a reference in the introduction to new List 12 relating to documents involving particular products or securities.
Although FINRA is not proposing any changes to the paragraph on confidentiality, FINRA intends to call attention to an article in FINRA’s newsletter for arbitrators and mediators, the Neutral Corner, that provides additional background on the subject.8 Non-substantive, stylistic changes are proposed in some Document Production Lists; for example, the term “Associated Person” would be changed to lower case to conform to usage in the Customer Code.
Document Production Lists 1 and 2 apply to all types of disputes. The remainder of the Document Production Lists are categorized by the type of dispute, and within each type, they list first what the industry party must produce, and then what the customer must produce. The discussion below addresses each list by its current number. It should be noted, however, that some lists would be renumbered and/or renamed as part of the proposed rule change.
List 1 – Documents to Be Produced in All Customer Cases by Firm/Associated Person(s) List 1 includes documents to be produced in all customer cases by firm/associated person(s).
FINRA proposes to delete the footnote in the heading for List 1. This information is covered in the Customer Code’s subpoena and discovery rules (Rules 12505 through 12514).
8 The article would be discussed in the Regulatory Notice announcing approval of the amendments to the Discovery Guide. The article, Arbitrators and Orders of
Confidentiality, The Neutral Corner, April 2004, is available at:
4 List 1, Item 1 requires firms and associated persons to produce all agreements with the customer, including account opening documents, cash, margin, and option agreements, trading authorizations, powers of attorney, or discretionary authorization agreements, and new account forms. FINRA proposes to amend Item 1 to require production of the account record information for the customer. The account record contains important information about the customer, such as the customer’s annual income, net worth, and account objectives, and it indicates whether the record has been signed by the associated person responsible for the account and approved or accepted by a principal of the firm.
FINRA proposes to delete List 1, Items 2 and 3 in their entirety. In many instances, the customer has retained account statements and/or confirmations, and requiring production of these documents in every case adds unnecessary delay and cost to the discovery process. If necessary, the customer may request these documents separately under proposed List 1, Item 2.
FINRA proposes to move current List 1, Item 5 into proposed new List 1, Item 2. Item 5 requires production of all correspondence between the customer and firm/associated person(s) relating to the transaction(s) at issue. Proposed Item 2 clarifies that the required documents are those that were sent to the customer or received by the firm and relate to the accounts or transactions at issue. A new sentence explains that monthly statements and confirmation slips need not be produced unless separately requested.
FINRA proposes to adopt new List 1, Item 3 to require the production of documents pertaining to the customer’s employment status, financial status, annual income, net worth, investment objectives, and risk tolerance. These documents would show what the firm/associated person(s) recorded about the customer’s financial status and investment objectives/risk tolerance.
5 List 1, Item 4 requires the production of all “holding (posting) pages” for the customer’s account(s) at issue or, if not available, any electronic equivalent. Holding pages are handwritten records of transactions made and kept by associated persons. FINRA proposes to delete Item 4 in its entirety, because holding pages generally are no longer in use, and transaction information in an electronic form would be available to the customer on account statements and/or confirmations.
FINRA proposes to adopt new Item 4 to require the production of documents evidencing any investment or trading strategies utilized or recommended in a customer’s account, including options programs, and any supervisory review of such strategies. New Item 4 would ensure that a customer has access to evidence of trading strategies utilized or recommended by the firm/associated person(s) that may not have been publicly disseminated by the firm/associated person(s). The proposal would also provide the customer with documentation of any management supervision over the account.
As noted above, FINRA has proposed to move List 1, Item 5 into Item 2.
List 1, Item 6 requires the production of all notes by the firm/associated person(s) or on his/her behalf, including entries in any diary or calendar, relating to the customer’s account.
FINRA proposes to modify the Item to clarify that notes of telephone calls or conversations must be produced and that required production is not limited to the items specified in the Item. The proposed amendment also provides that required production relates to the customer, in addition to those relating to his or her account(s) or transactions at issue. Because Item 6 requires production of all notes by the firm/associated person(s), the phrase “or on his/her behalf” would be deleted as unnecessary. This Item would be renumbered as Item 5.
Current List 1, Item 7 requires the production of all recordings and notes of telephone 6 calls or conversations about the customer’s account(s) at issue that occurred between the associated person(s) and the customer, and/or between the firm and the associated person(s).
FINRA proposes to delete Item 7 in its entirety. Notes of telephone calls or conversations would continue to be discoverable under proposed new Item 5, discussed above. FINRA proposes to eliminate mandatory production of recordings in every case because producing recordings is labor intensive, expensive, and unnecessary in cases where there is no dispute relating to conversations between the parties. Recordings would continue to be subject to discovery on a case by case basis, as the arbitrators deem to be appropriate under Rule 12507 of the Customer Code (Other Discovery Requests).
Current List 1, Item 8 requires production of all Forms RE-3, U4 and U5 including all amendments, all customer complaints identified in such forms, and all customer complaints of a similar nature against the associated person(s) handling the account(s) at issue. FINRA proposes to amend this item to clarify that Disclosure Reporting Pages must be produced. These pages, which are part of Forms U4 and U5, provide customer claimants with valuable, detailed information about prior customer complaints. With regard to customer complaints alleging conduct of a similar nature to that alleged in the Statement of Claim, the amendments would allow the firm/associated person(s) to redact portions of these documents to prevent disclosure of nonpublic personal information about other customers. Item 8 would be renumbered as Item 6.
Current List 1, Item 9 requires production of all sections of the firm’s Compliance Manual(s) related to the claims alleged in the Statement of Claim, including any separate or supplemental manuals governing the duties and responsibilities of the associated person(s) and supervisors, any bulletins (or similar notices) issued by the compliance department, and the table of contents and index to each Manual. FINRA proposes to amend this Item to replace 7 “Compliance Manual(s)” with “manuals and any updates thereto” and “compliance department” with “firm.” The proposal would clarify that manuals must be produced regardless of whether the firm characterizes them as “Compliance Manuals,” and bulletins must be produced from any department issuing them. FINRA is also proposing to require the production of updates to the firm’s manuals for the time period related to the claims at issue. Updates are material to establishing the firm’s procedures in place during a specified time frame. Item 9 would be renumbered as Item 7.
Current List 1, Item 10 requires the production of all analyses and reconciliations of the customer’s account(s) during the time period and/or relating to the transaction(s) at issue.