
[Federal Register: August 3, 2010 (Volume 75, Number 148)]
[Notices]               
[Page 45685-45692]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au10-133]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62584; File No. SR-FINRA-2010-035]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Amendments to 
the Discovery Guide and Rules 12506 and 12508 of the Code of 
Arbitration Procedure for Customer Disputes

July 28, 2010.
    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 July 12, 2010, the 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 prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Discovery Guide, which includes 
Document Production Lists, and to make conforming changes to Rules 
12506 and 12508 of the Code of Arbitration Procedure for Customer 
Disputes (``Customer Code'').
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA proposes to revise the Discovery Guide (``Guide'') to expand 
the guidance FINRA gives to parties and arbitrators on the discovery 
process and to update the Document Production Lists (``Lists''). The 
proposal includes conforming changes to Rules 12506 and 12508 of the 
Customer Code.

Background

    The SEC approved the current Guide in 1999 and FINRA made it 
available for use in arbitration proceedings involving customer 
disputes upon the publication of Notice to Members (NTM) 99-90 
(November 1999). The Guide provides guidance to parties on which 
documents parties should exchange without arbitrator or staff 
intervention, and to arbitrators in determining which documents 
customers and member firms or associated persons are presumptively 
required to produce in customer arbitrations.
    In March 2004, FINRA determined to review the Guide and consider 
whether FINRA should update the Guide after more than four years of 
use. A FINRA Advisory Committee, the National Arbitration and Mediation 
Committee (``NAMC''), conducted the review. The NAMC is a majority 
public committee made up of attorneys who represent investors, 
attorneys who represent brokerage firms, arbitrators, and mediators. In 
addition, FINRA staff met with other frequent users of the forum 
representing both the public and the industry to listen to the concerns 
of each side about the current lists, their proposals for changes, and 
their reactions to other constituents' proposals. FINRA worked for 
three years to build a consensus on revisions to the Guide.
    In 2008, FINRA filed a proposed rule change with the SEC to update 
the Guide (``the 2008 proposal''). The 2008 proposal added clarifying 
and conforming language to the introduction in the Guide and updated 
the Lists. The SEC received 53 comment letters on the 2008 proposal 
that clearly signaled that the consensus reached on revisions to the 
Guide was not broad enough. In light of the comment letters, FINRA 
withdrew the filing.\3\
---------------------------------------------------------------------------

    \3\ FINRA filed SR-FINRA 2008-024 on June 11, 2008 and withdrew 
the filing on May 21, 2009.
---------------------------------------------------------------------------

    FINRA staff drafted a new Guide which would replace the current 
Guide in its entirety. The starting point was the 2008 proposal and the 
comment letters submitted to the SEC on the 2008 proposal. NAMC members 
shared the staff's draft with interested parties including, among 
others, attorneys who represent investors, in-house counsel at 
brokerage firms, and attorneys who handle investor claims at Law School 
clinics. The NAMC recommended that FINRA appoint a Subcommittee to 
review the proposal. The Subcommittee, comprised of public and industry 
NAMC members, reached consensus on a number of revisions to the Guide. 
The NAMC reviewed the Subcommittee's recommended changes and agreed to 
make additional revisions. The proposed rule change incorporates the 
NAMC's suggested revisions.
    Commenters on the 2008 proposal suggested that it may be 
appropriate to eliminate the Lists for specific types of claims since 
claimants are not required to plead causes of action under the Customer 
Code. In response to these comments, FINRA proposes to replace the 14 
current Lists (two general Lists and 12 separate Lists for specific 
types of claims) with two Lists. The Lists identify ``presumptively 
discoverable'' documents--one for firms/associated persons to produce 
and one for customers to produce. Although each item on the Lists (with 
a few exceptions) would be presumptively discoverable in every customer 
case, parties can still urge that certain documents should not be 
discoverable. Likewise, parties can ask arbitrators to order production 
of additional documents that are not on the Lists. The proposed rule 
change emphasizes that arbitrators retain the flexibility necessary to 
tailor the Guide to the facts and circumstances of each case. This is 
especially important because, with the reduction of the Lists from 14 
to two, production is no longer dependent on the nature of the claim.

Proposed Revisions to the Guide's Introduction

    FINRA is proposing a number of revisions to the Guide's 
introduction that expand the guidance given to parties and arbitrators 
on the discovery process generally and clarify how arbitrators should 
apply the Guide in arbitration proceedings.
    The current Guide states that it does not intend to remove the 
arbitrators' and parties' flexibility in the discovery

[[Page 45686]]

process and that arbitrators can order parties to produce documents 
that are not on the Lists or alter the parties' production schedule. 
FINRA would revise the introduction to add that arbitrators also can 
order that parties do not have to produce certain documents on the 
Lists. The proposed revision would add clarity to the Guide by 
indicating that the arbitrator's flexibility also includes the ability 
to order that parties do not have to produce particular documents.
    FINRA is proposing to add guidance on how arbitrators should handle 
objections based on cost or burden of production. The introduction 
would state that if a party demonstrates that the cost or burden is 
disproportionate to the need for the document, the arbitrators should 
determine if the document is relevant or likely to lead to relevant 
evidence. 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 impact of production, such as 
narrowing the time frame or scope of an item, or determining whether 
another document can provide the same information. Since FINRA is 
proposing to require production of most of the List items in every 
case, it is important to emphasize that arbitrators may consider 
alternative ways to facilitate discovery. FINRA believes the discussion 
will help arbitrators to balance the parties' discovery needs with the 
need to keep the arbitration process expeditious and cost effective.
    FINRA is proposing to move to the introduction the content in 
current footnote one, which explains that only parties must produce 
documents pursuant to the Guide. FINRA is not proposing to make any 
substantive changes to the content of the footnote.
    FINRA is proposing to state that certain items on the Lists may not 
be relevant in a particular case when the firm's business model (e.g., 
full service firm, discount broker, or online broker) is considered. 
FINRA members create and retain various documents for business and 
regulatory purposes. Depending on how a firm operates, a particular 
item on the Lists may or may not be relevant. The proposed addition to 
the introduction would enhance the Guide because it makes parties and 
arbitrators aware that it is appropriate to recognize firm differences 
during the discovery process.
    FINRA considers electronic files to be documents within the meaning 
of the Guide. FINRA is proposing to update the Guide by expressly 
stating that electronic files are documents within the meaning of the 
Guide and that arbitrators shall decide any disputes that arise about 
the form in which a party produces a document.
    Commenters on the 2008 proposal expressed concerns that FINRA does 
not give arbitrators and parties enough guidance about what information 
they should treat as confidential. The commenters asked FINRA to 
incorporate into the Guide language from an article in FINRA's 
newsletter for arbitrators and mediators, the Neutral Corner,\4\ that 
advises arbitrators that the party asserting confidentiality in the 
discovery process has the burden of establishing that the documents 
require confidential treatment and enumerates factors that arbitrators 
should consider when deciding questions about confidentiality. In 
response to the comments, FINRA is proposing to expand the discussion 
on confidentiality in the Guide to include the statement relating to 
the burden of establishing that documents require confidential 
treatment and to enumerate factors that arbitrators should consider 
when deciding questions about confidentiality. The factors include:
---------------------------------------------------------------------------

    \4\ The article, Arbitrators and Orders of Confidentiality, The 
Neutral Corner, April 2004, is available at: http://www.finra.org/
ArbitrationMediation/Neutrals/Education/NeutralCorner/P010040.
---------------------------------------------------------------------------

     Whether the disclosure would constitute an unwarranted 
invasion of personal privacy (e.g., an individual's Social Security 
number, or medical information);
     Whether there is a threat of harm attendant to disclosure 
of the information;
     Whether the information contains proprietary confidential 
business plans and procedures or trade secrets;
     Whether the information has previously been published or 
produced without confidentiality or is already in the public domain;
     Whether an excessively broad confidentiality order could 
be against the public interest or could otherwise impede the interests 
of justice; and
     Whether there are legal or ethical issues which might be 
raised by excessive restrictions on the parties.
    Currently, if a party states that no responsive documents for a 
particular item ``exist,'' and the requesting party asks for an 
affirmation to that effect, the responding party is required to make 
such an affirmation. FINRA is proposing to delete the word ``exist'' 
and to refer instead to documents ``in the party's possession, custody, 
or control.'' FINRA believes that ``exist'' is vague and that the new 
phrase would add clarity to the Guide by explaining which documents 
parties are required to produce. FINRA would clarify that, in 
appropriate cases, the arbitrators may order a party to provide an 
affirmation regarding a discovery request for documents beyond those 
contained in the Guide. FINRA also proposes to revise the Guide 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.

List 1--Documents the Firm/Associated Persons Shall Produce in All 
Customer Cases

    The documents identified in each numbered item are presumptively 
discoverable in every case unless the item specifically limits 
production to a specific type of claim. To distinguish between 
customers who are parties to an arbitration and other customers of a 
brokerage firm, the discussion below refers to customer parties as 
``claimants'' throughout.
    Proposed List 1, Item 1--In the current Guide, firms/associated 
persons are required to produce agreements with claimants relating to 
account opening documents, and new account forms, cash, margin, and 
option agreements, trading authorizations, discretionary 
authorizations, and powers of attorney (see current List 1, Item 1). 
FINRA is also proposing to expand this item to require firms/associated 
persons to produce account record information (including the claimants' 
names, tax identification numbers, addresses, telephone numbers, dates 
of birth, employment statuses, annual incomes, net worth, and account 
investment objectives) and documents relating to the claimants' risk 
tolerance. The account record contains information about the claimants 
that the firm recorded. The record also indicates whether the 
associated persons responsible for the account signed the record and 
whether a principal at the firm approved or accepted the record.
    Proposed List 1, Item 2--The current Guide requires firms/
associated persons to produce all correspondence between the claimants 
and the firm/associated person relating to the transactions at issue 
(see current List 1, item 5). Firms/associated persons are also 
required to produce account statements for the claimants' accounts (see 
current List 1, Item 2) and confirmations for the claimants' 
transactions at issue (see current List 1, Item 3).
    FINRA is proposing to add clarity to the item by: (1) Specifying 
that the required documents are those that were sent to the claimants 
or received by the firm and relate to the accounts or

[[Page 45687]]

transactions at issue; and (2) specifying that firms/associated persons 
are required to produce, among other documents, those that relate to 
asset allocation, diversification, trading strategies, and market 
conditions.
    Commenters on the 2008 proposal requested that FINRA require firms/
associated persons to produce statement inserts and marketing materials 
if requested. In response to the commenters' request, FINRA proposes to 
expand the item to require firms/associated persons to produce all 
advertising materials sent to customers of the firm that refer to the 
securities and/or account types that are at issue. This addition would 
provide claimants with documents the firm disseminated which advertised 
the specific products or account types that are at issue in the case, 
without requiring firms to produce all generic materials sent to all 
customers.
    FINRA is proposing to eliminate the requirement that firms/
associated persons produce account statements for the claimants' 
accounts and confirmations for the claimants' transactions at issue. In 
many instances, the claimants have 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 claimants may request these documents separately.
    Proposed List 1, Item 3--FINRA is proposing to require firms/
associated persons to produce documents evidencing investment or 
trading strategies utilized or recommended in the claimants' accounts, 
including, but not limited to, options programs, and any supervisory 
review of such strategies. This new item in the Guide would ensure that 
claimants have access to evidence of trading strategies utilized or 
recommended that the firm/associated persons may not have publicly 
disseminated. The proposal also provides claimants with documentation 
of any management supervision over the accounts.
    Proposed List 1, Item 4--In the current Guide, for claims alleging 
unauthorized trading, firms/associated persons are required to produce 
the documents they relied on to establish that claimants authorized the 
transactions at issue (See current List 11, Item 3). For claims 
alleging unauthorized trading, the proposed Guide would also require 
firms/associated persons to produce all documents relating to the 
claimants' authorization of transactions. This addition acknowledges 
that there may be documents in addition to those relied on by the firm 
that are relevant or could lead to relevant evidence.
    Proposed List 1, Item 5--The current Guide requires firms/
associated persons to produce, for specified claim types, all materials 
prepared or used by the firm/associated persons relating to the 
transactions or products at issue, including research reports, 
prospectuses, and other offering documents such as documents intended 
or identified as being ``for internal use only,'' and worksheets or 
notes indicating the associated persons reviewed or read such 
documents. As an alternative, the firm/associated persons may produce a 
list of such documents that contains sufficient detail for the 
claimants to identify each document listed. Upon request by a party, 
the firm/associated persons are required to provide any documents 
identified on that alternative list (see current List 7 titled 
Misrepresentation/Omissions, List 9 titled Negligence/Breach of 
Fiduciary Duty, and List 13, Item 1 relating to claims alleging 
unsuitability).
    FINRA is proposing to add clarity to this item by specifying that, 
in addition to materials prepared or used by the firm/associated 
persons, the firm/associated persons must produce the materials 
provided to the claimants. The amendments would also require production 
of sales materials and performance or risk data. FINRA is proposing to 
delete the alternative two-step production procedure to reduce delays 
in the discovery process.
    Proposed List 1, Item 6--The current Guide requires firms/
associated persons to produce all notes, including entries in any diary 
or calendar, relating to the claimants' accounts at issue (see current 
List 1, Item 6). FINRA is proposing to expand the scope of the item by 
requiring production of notes relating to the claimants in addition to 
the claimants' accounts or transactions at issue. For example, notes 
about the claimants' other accounts may provide evidence in the case.
    Proposed List 1, Item 7--The current Guide requires firms/
associated persons to produce records relating to the claimants' 
accounts at issue, such as internal reviews and exception and activity 
reports, which reference the claimants' accounts at issue (see current 
List 1, Item 11). FINRA is proposing to clarify the item by specifying 
that firms/associated persons would be required to produce notes or 
memoranda evidencing supervisory, compliance, or managerial review of 
the claimants' accounts or trades for the period at issue. The item 
would also require production of correspondence between the claimants 
and the firm/associated persons relating to the claimants' accounts or 
transactions that bear indications of managerial, compliance, or 
supervisory review of such correspondence. The Guide would address 
exception reports and supervisory reviews, among other documents, in 
proposed Item 13.
    Proposed List 1, Item 8--The current Guide requires firms/
associated persons to produce recordings and notes of telephone calls 
or conversations about the claimants' accounts at issue that occurred 
between the associated persons and the claimants (see current List 1, 
Item 7). FINRA proposes to expand this item to include telephone logs. 
Currently, telephone logs are only required in cases alleging 
unauthorized trading (see current List 11, Item 2). However, FINRA 
would narrow the item from records relating to the claimant's 
``accounts at issue'' to records relating to the ``transactions at 
issue.'' Producing recordings of telephone calls is labor intensive, 
expensive, and difficult for firms unless the claimants are able to 
specify a telephone call's date and time, provide the name of a person 
the claimants spoke to at the firm, and/or specify the trade placed 
during the conversation.
    Proposed List 1, Item 9--FINRA is proposing to require firms/
associated persons to produce writings reflecting communications 
between the associated persons assigned to the claimants' accounts at 
issue during the time period at issue and members of the firm's 
compliance department relating to the securities/products at issue and/
or the claimants' accounts. FINRA believes that such writings may 
provide evidence relating to, among other matters, supervision of the 
associated persons handling the claimants' accounts. This item would be 
new in the Guide.
    Proposed List 1, Item 10--The current Guide requires firms/
associated persons to produce Forms RE-3, U-4, and U-5, including all 
amendments, customer complaints identified in the forms, and customer 
complaints of a similar nature against the associated persons handling 
the accounts at issue (see current List 1, Item 8).
    FINRA proposes to amend this item to require that firms/associated 
persons produce Forms RE-3, U-4, and U-5, and the Disclosure Reporting 
Pages for the associated persons assigned to the claimants' accounts at 
issue during the time period at issue. Disclosure Reporting Pages, 
which are actually part of Forms U-4 and U-5, provide claimants with 
valuable, detailed information about prior customer

[[Page 45688]]

complaints. FINRA would narrow production of these forms to the 
associated persons assigned to the claimants' accounts at issue during 
the time period at issue, to ease the burden of production for the 
firms. Because of the sensitive nature of the personal information, 
FINRA would permit the firm to redact the associated persons' Social 
Security numbers.
    Commenters on the 2008 proposal requested that FINRA require firms/
associated persons to produce all customer complaints against the 
associated persons. To respond to these comments, FINRA proposes to 
require firms/associated persons to produce all customer complaints 
filed against the associated persons assigned to the accounts at issue 
that were generated between three years prior to the first transactions 
at issue through filing of the Statement of Claim, redacted to prevent 
disclosure of nonpublic personal information about complaining 
customers.
    Proposed List 1, Item 11--The current Guide requires firms/
associated persons to produce all sections of the firm's Compliance 
Manuals related to the claims alleged in the Statement of Claim, 
including any separate or supplemental manuals governing the duties and 
responsibilities of the associated persons and supervisors, any 
bulletins (or similar notices) issued by the compliance department, and 
the table of contents and index to each Manual (see current List 1, 
Item 9).
    FINRA is proposing to amend this Item to replace compliance manuals 
with ``manuals and all updates thereto'' and compliance department with 
``firm.'' The proposal would clarify that the firm/associated persons 
must produce the manuals regardless of whether the firm characterizes 
them as ``compliance manuals,'' and firms/associated persons must 
produce bulletins from any department issuing them. FINRA is also 
proposing to clarify that production of manuals, bulletins, and updates 
is required for all years in which the Statement of Claim alleges that 
the conduct occurred. Updates are material to establishing the firm 
procedures in place during a specified time frame.
    FINRA would also amend the item to require firms/associated persons 
to provide a list of all of manuals and bulletins which may contain 
directives related to the conduct or product at issue in the claim. The 
list would enable claimants to identify any additional manual or 
bulletin sections that may be relevant to their claims.
    Proposed List 1, Item 12--The current Guide requires firms/
associated persons to produce all analyses and reconciliations of the 
claimants' accounts during the time period and/or relating to the 
transactions at issue (see current List 1, Item 10). FINRA is proposing 
to amend this item to clarify that production is limited to analyses 
and reconciliations ``prepared'' during the time period at issue, and 
includes analyses and reconciliations prepared as part of a review of 
the claimants' accounts or transactions at issue. These documents are 
valuable because they may contain firm findings concerning reviews of 
claimants' accounts.
    Proposed List 1, Item 13--For claims alleging failure to supervise, 
the current Guide requires the production of all exception reports and 
supervisory activity reviews relating to the associated persons and/or 
the claimants' accounts generated not earlier than one year before or 
not later than one year after the transactions at issue, and all other 
documents reflecting supervision of the associated persons and the 
claimants' accounts (see current List 5, Item 2).
    FINRA is proposing to require firms/associated persons to produce 
all exception reports, supervisory activity reviews, concentration 
reports, active account runs, and similar documents produced to review 
for activity in the claimants' accounts related to the allegations in 
the Statement of Claim or in which the transactions at issue are 
referenced or listed.
    For claims alleging failure to supervise, FINRA is proposing to 
expand production beyond the review of activity in the claimants' 
accounts also to cover other customer accounts handled by associated 
persons at the firm. In such cases, FINRA is proposing to require 
firms/associated persons to produce all exception reports, supervisory 
activity reviews, concentration reports, active account runs, and 
similar documents produced to review for activity in customer accounts 
handled by associated persons and related to the allegations in the 
Statement of Claim that were generated not earlier than one year before 
or not later than one year after the transactions at issue.
    FINRA would limit production to documents related to the 
allegations made in the Statement of Claim to ease the burden of 
production for firms/associated persons. FINRA believes that narrowing 
the item would not negatively impact claimants because firms/associated 
persons would continue to produce reports related to the claimants' 
claims.
    Proposed List 1, Item 14--For claims alleging failure to supervise, 
the current Guide requires production of the portions of internal audit 
reports at the branch in which the claimants maintained accounts that 
focused on the associated persons or the transactions at issue, and 
were generated not earlier than one year before or not later than one 
year after the transactions at issue and discussed alleged improper 
behavior in the branch against other individuals similar to the 
improper conduct alleged in the Statement of Claim (see current List 5, 
Item 3). FINRA is not proposing any substantive changes to this Item.
    Proposed List 1, Item 15--The current Guide requires the production 
of records of disciplinary action taken against associated persons by 
any regulator or employer for all sales practice violations or conduct 
similar to the conduct alleged to be at issue (see current List 1, Item 
12). FINRA is not proposing any substantive changes to this item.
    Proposed List 1, Item 16--FINRA is proposing to require firms/
associated persons to produce all investigations, charges, or findings 
by any regulator (state, federal or self-regulatory organization) and 
the firm/associated persons' responses to such investigations, charges, 
or findings for the associated persons' alleged improper behavior 
similar to that alleged in the Statement of Claim. This new item in the 
Guide would expand the scope of documents that relate to the associated 
persons' disciplinary history.
    Proposed List 1, Item 17--For claims alleging failure to supervise, 
the current Guide requires production of the portions of examination 
reports or similar reports following an examination or an inspection 
conducted by a state or federal agency or a self-regulatory 
organization that focused on the associated persons or the transactions 
at issue or that discussed alleged improper behavior in the branch 
against other individuals similar to the improper conduct alleged in 
the Statement of Claim (see current List 5, Item 4). Commenters on the 
2008 proposal requested that FINRA include a time limit for production 
of these documents. In response to these comments, FINRA is proposing 
to limit production to those reports issued for the period one year 
before the transactions at issue through the filing of the Statement of 
Claim. FINRA believes that restricting the time frame for production 
would reduce the firms' burden of production and offset the expansion 
of this production to all cases while ensuring that claimants have 
access to the reports that relate to their claims.

[[Page 45689]]

    Proposed List 1, Item 18--FINRA is proposing to require firms/
associated persons to produce documents the respondents obtained by 
subpoena or by document requests directed to third parties. While this 
item would be new in the Guide, it is not a new requirement because the 
subpoena rule, Rule 12512(e), already requires production of subpoenaed 
documents. FINRA is proposing to cross-reference that rule in the 
Guide. FINRA would also add documents received by request directed to 
third parties at any time during the case to ensure that all parties 
have access to documents obtained without a subpoena from non-parties.
    Proposed List 1, Items 19, 20, and 21--In the current Guide, firms/
associated persons are required to produce documents relating to 
associated persons' commissions and/or compensation when claimants 
allege churning (see current List 3, Items 1-3), failure to supervise 
(see current List 5, Item 1), or unsuitability (see current List 13, 
Item 2).
    Proposed List 1, Item 19--FINRA is proposing to require firms/
associated persons to produce documents showing the associated persons' 
gross and net compensation for the transactions at issue in the 
Statement of Claim. This is new in the Guide. Documentation of 
compensation on an order-by-order basis provides parties with a clear 
understanding of how much firms paid associated persons for the trading 
at issue. If the accounts at issue were the subject of fee arrangements 
that are not based on remuneration per trade, firms/associated persons 
would be required to produce a record of compensation earned for the 
period when the transactions in the accounts took place.
    Proposed List 1, Item 20--The current Guide requires firms/
associated persons to produce commission runs relating to the 
claimants' accounts at issue or, in the alternative, a consolidated 
commission report relating to the accounts (see current List 3, Item 
1). It also requires firms/associated persons to produce documents 
reflecting compensation of any kind, including commissions, from all 
sources generated by the associated persons assigned to the claimants' 
accounts for the two months preceding, through the two months 
following, the transactions at issue, or up to 12 months, whichever is 
longer. The firm may redact all information identifying customers who 
are not parties to the action except for the last four digits of the 
non-party customer account number for each transaction (see current 
List 3, Item 2).
    In addition, for claims related to solicited trading activity, 
FINRA is proposing to require the firm/associated persons to produce a 
record of all compensation, monetary and non-monetary, including, but 
not limited to, monthly commission runs for the associated persons who 
handled the claimants' accounts. That record should reflect the 
securities traded, dates traded, whether the trades were solicited or 
unsolicited, and the gross and net commission from each trade. Firms 
would be required to produce this record for a period of time beginning 
three months before and ending three months after the trades at issue 
in the claimants' accounts. FINRA is proposing to impose this 
additional production only in claims relating to solicited trading 
activity because the records would be most relevant to such activity. 
The required documents may provide claimants with evidence regarding 
the extent to which the associated person recommended securities to 
other customers.
    The firm may redact names and other non-public personal information 
concerning customers who are not parties to this claim, but would be 
required to provide sufficient information to identify: (1) The non-
party customers' accounts, including the last four digits of the non-
party customers' account numbers; (2) the associated persons' own and 
related accounts, including the last four digits of the associated 
persons' account numbers; and (3) the type of account (IRA, 401(k), 
etc.). Activity in the associated persons' account may be correlated to 
the transactions in the customers' accounts.
    Proposed List 1, Item 21--The current Guide requires firms/
associated persons to produce documents describing the basis upon which 
the firm compensated the associated persons during the years in which 
the transactions or occurrences in question occurred, including any 
bonus or incentive program, and compensation and commission schedules 
(see current List 3, Item 3 and current List 13, Item 2). FINRA would 
add clarity to this item by requiring production of a record of all 
agreements pertaining to the relationship between the associated person 
and the firm, summarizing the associated person's compensation 
arrangement or plan with the firm, including commission and concession 
schedules, bonus or incentive plans, and schedules showing 
compensation. If the firm based the associated persons' compensation on 
factors other than remuneration per trade, the item would require 
documentation of the method by which compensation was determined.
    Proposed List 1, Item 22--For claims with allegations relating to 
an insurance product that includes a death benefit, FINRA is proposing 
to require firms/associated persons to produce all information 
concerning the claimants' insurance holdings and the recommendations, 
if any, to the claimants regarding insurance products. This new 
requirement in the Guide could provide parties with evidence in cases 
involving annuities.

Items Firms/Associated Persons Would No Longer Be Required To Produce

    Holding Pages--In the current Guide, firms/associated persons are 
required to produce holding pages for the claimants' accounts at issue 
(see current List 1, Item 4). FINRA is proposing to delete this item 
from the Guide because holding pages (hand written records of 
transactions made and kept by associated persons) are, generally, no 
longer in use. Firms provide transaction information to customers on 
account statements and/or confirmations.
    Order tickets--In the current Guide, firms/associated persons are 
required to produce order tickets for the claimants' transactions in 
cases alleging unauthorized trading (see current List 11, Item 1). 
FINRA is proposing to delete this requirement from the Guide because 
production of order tickets is burdensome and evidence relating to 
whether the claimants authorized a particular transaction would be 
produced under proposed List 1, Items 4, 6, and 8.

List 2--Documents the Customers Shall Produce in All Customer Cases

    The documents identified in each numbered item are presumptively 
discoverable in every case unless the item specifically limits 
production to a specific type of claim.
    As stated above, to distinguish between customers who are parties 
to an arbitration and other customers of a brokerage firm, the 
discussion below refers to customer parties as ``claimants'' 
throughout.
    Proposed List 2, Item 1--In the current Guide, claimants are 
required to produce all claimant and claimant-owned business (including 
partnership or corporate) 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). FINRA is 
proposing to expand this item to require production of Form 1040 
schedule A and the IRS worksheets

[[Page 45690]]

related to Schedules A, B, D, and E. The expanded production would 
provide parties with a broader understanding of the claimants' 
financial status and investment activity during the relevant period. 
The amendments would provide that the income tax returns must be 
identical to those that the claimants filed with the Internal Revenue 
Service.
    Because of the sensitive nature of the personal information, FINRA 
would permit claimants to redact their Social Security numbers. FINRA 
would also permit claimants to redact information relating to medical 
and dental expenses and the names of charities on Schedule A unless the 
information relates to the allegations in the Statement of Claim.
    Proposed List 2, Item 2--The current Guide requires claimants to 
produce financial statements or similar statements of the claimants' 
assets, liabilities, and/or net worth for the period covering the three 
years prior to the first transaction at issue in the Statement of Claim 
through the date the claimants filed the Statement of Claim (see 
current List 2, Item 2). FINRA is proposing to add clarity to this item 
by specifying that financial statements include statements within a 
loan application. The item would also provide that claimants are not 
required to create financial statements in order to comply with the 
item.
    Proposed List 2, Item 3--The current Guide requires claimants to 
produce copies of all documents received from the firm/associated 
persons and from any entities in which the claimants invested through 
the firm/associated persons, including monthly statements, opening 
account forms, confirmations, prospectuses, annual and periodic 
reports, and correspondence (see current List 2, Item 3). FINRA is 
proposing to expand this item to include research reports. Research 
reports may provide evidence concerning the basis for the claimants' 
investment decisions.
    FINRA is proposing to eliminate mandatory production of account 
statements and confirmations if claimants stipulate to having received 
them. The amendments would require claimants to produce any statements 
or confirmations with hand written notations on them or which are not 
identical to those sent by the firm. The amendments would decrease 
claimants' discovery costs while preserving the requirement to produce 
documents that may have probative value.
    Proposed List 2, Item 4--The current Guide requires claimants to 
produce account statements and confirmations for accounts maintained at 
securities firms other than the respondent firm for the three years 
prior to the first transaction at issue in the Statement of Claim 
through the date the claimants filed the Statement of Claim (see 
current List 2, Item 4). FINRA is proposing to amend this item to 
permit claimants to provide written authorization allowing the firm/
associated persons to obtain account statements directly from the 
securities firms instead of providing copies of the statements. If the 
claimants elect to provide written authorization to the firm/associated 
persons to obtain the account statements, the claimants would still be 
required to provide all account statements in the claimants' 
possession, custody, or control with hand written notations on them or 
which are not identical to those sent by the firm. The proposal would 
ensure that other parties to the matter have a complete understanding 
of the claimants' investing history. FINRA proposes to eliminate 
confirmations from the item to ease the burden for investors. If 
necessary, firms would be able to request confirmations separately.
    Proposed List 2, Item 5--The current Guide requires claimants to 
produce agreements, forms, information, or documents relating to the 
accounts at issue signed by or provided by the claimants to the firm/
associated persons (see current List 2, Item 5). FINRA is proposing to 
expand the scope of this item by requiring production of documents 
relating to accounts or transactions at the firm regardless of whether 
claimants signed the documents.
    Proposed List 2, Item 6--The current Guide requires claimants to 
produce account analyses and reconciliations prepared by or for the 
claimants relating to the accounts at issue (see current List 2, Item 
6). FINRA is proposing to provide clarity to this item by changing 
``the account(s) at issue'' to ``the accounts at the respondent firm or 
transactions with the respondent firm during the time period at 
issue.''
    Proposed List 2, Item 7--The current Guide requires claimants to 
produce notes, including entries in diaries or calendars, relating to 
the accounts at issue (see current List 2, Item 7). FINRA is proposing 
to amend this item to provide clarity by changing ``the account(s) at 
issue'' to ``accounts at the respondent firm or transactions at issue 
with the respondent firm.''
    Proposed List 2, Item 8--The current Guide requires claimants to 
produce recordings and notes of telephone calls or conversations about 
the claimants' accounts at issue that occurred between the associated 
persons and the claimants (and any person purporting to act on behalf 
of the claimants) (see current List 2, Item 8). For claims alleging 
unauthorized trading, claimants are also required to produce telephone 
records, including telephone logs, evidencing telephonic contact 
between the claimants and the firm/associated persons (see current List 
12, Item 1). FINRA is proposing to combine these items into new Item 8. 
FINRA is not proposing any substantive changes to the items.
    Proposed List 2, Item 9--The current Guide requires claimants to 
produce correspondence between the claimants (and any person acting on 
behalf of the claimants) and the firm/associated persons relating to 
the accounts at issue (see current List 2, Item 9). FINRA is proposing 
to amend this item to broaden the scope of production by deleting the 
reference to firm/associated persons. The claimants may have 
corresponded with persons/entities unrelated to the firm concerning the 
transactions at issue.
    Proposed List 2, Item 10--The current Guide requires claimants to 
produce previously prepared written statements by persons with 
knowledge of the facts and circumstances related to the accounts at 
issue, including those by accountants, tax advisors, financial 
planners, other associated persons, and any other third party (see 
current List 2, Item 10). FINRA is not proposing any substantive 
changes to the current item.
    Proposed List 2, Item 11--The current Guide requires claimants to 
produce complaints/Statements of Claim and answers filed in all civil 
actions involving securities matters and securities arbitration 
proceedings, and all final decisions and awards entered in these 
matters (see current List 2, Item 12). FINRA is proposing to expand the 
scope of this item by requiring claimants to produce non-confidential 
settlements entered in these matters because the subject matter of non-
confidential settlements may be relevant to the pending case. The item 
would specify that claimants must produce the documents for all claims 
or complaints filed prior to the filing of the current Statement of 
Claim.
    FINRA is also proposing to add that, if a person is party to a 
confidential settlement agreement that by its terms does not preclude 
identification of the existence of the settlement agreement, the party 
must identify the documents comprising the confidential settlement 
agreement. The proposed change would state that, although not 
presumptively discoverable, the panel could order the claimants to 
produce a confidential settlement agreement. The proposal would ensure 
that parties are aware of

[[Page 45691]]

other securities actions in which the claimants were parties.
    Proposed List 2, Item 12--For claims alleging misrepresentation/
omissions (see current List 8, Item 1), negligence/breach of fiduciary 
duty (see current List 10, item 1), or unsuitability (see current List 
14, Item 1), the current Guide requires claimants to produce documents 
showing the claimants' ownership in or control over any business 
entity, including general and limited partnerships and closely held 
corporations. FINRA is proposing to expand the scope of this item to 
require that if the claimants are Trustees, they must also provide 
documents showing all accounts over which they have trading authority. 
The Trustees' trading activity for other accounts may provide evidence 
of the Trustees' investment sophistication.
    Proposed List 2, Item 13--For claims alleging unsuitability, the 
current Guide requires claimants to produce written documents they 
relied upon in making the investment decisions at issue (see current 
List 14, Item 2). FINRA is proposing to delete the reference to 
``documents relied upon'' and require production of all documents the 
claimants ``received, including documents found through the claimants' 
own efforts, relating to the investments at issue.'' Documents the 
claimants received that relate to the investment at issue could provide 
relevant evidence in a case even if the claimants did not rely on them 
in making an investment decision.
    Proposed List 2, Item 14--For claims alleging unauthorized trading, 
the current Guide requires claimants to produce documents relied on to 
show that transactions were made without the claimants' knowledge or 
consent (see current List 12, Item 2). FINRA is not proposing any 
substantive changes to the item and is proposing to limit the item to 
claims alleging unauthorized trading.
    Proposed List 2, Item 15--FINRA is proposing to require claimants 
to produce all materials received or obtained from any source relating 
to the transactions or products at issue, and other investment 
opportunities, including research reports, sales literature, 
performance or risk data, prospectuses, and other offering documents, 
including documents intended or identified as being ``for internal use 
only,'' and worksheets or notes. This item would be new in the Guide. 
Production of these documents may provide evidence concerning the bases 
for claimants' trading decisions. Therefore, FINRA also is proposing to 
require claimants to produce any similar materials received or obtained 
relating to other investment opportunities.
    Proposed List 2, Item 16--For claims alleging misrepresentation/
omission (see current List 8, Item 2), negligence/breach of fiduciary 
duty (see current List 10, Item 2), or unsuitability (see current List 
14, Item 3), claimants are required to produce a copy of their resumes. 
While FINRA is not proposing any substantive changes to the item, 
claimants would be required to produce the documents in every case.
    Proposed List 2, Item 17--For claims alleging misrepresentation/
omission (see current List 8, Item 3), negligence/breach of fiduciary 
duty (see current List 10, Item 3), or unsuitability (see current List 
14, Item 4), claimants are required to produce documents showing their 
educational and employment background, or a description of their 
background if not set forth in a resume. While FINRA is not proposing 
any substantive changes to the item, claimants would be required to 
produce the documents in every case.
    Proposed List 2, Item 18--FINRA is proposing to require claimants 
to produce documents the claimants obtained by subpoena or by document 
requests directed to third parties. While this item would be new in the 
Guide, it is not a new requirement because the subpoena rule, Rule 
12512(e), already requires production of subpoenaed documents. FINRA is 
proposing to cross-reference that rule in the Guide. FINRA would also 
add documents received by request directed to third parties at any time 
during the case, to ensure that all parties have access to documents 
obtained without a subpoena from non-parties.
    Proposed List 2, Item 19--For claims involving an insurance product 
that provides a death benefit, FINRA is proposing to require claimants 
to produce all insurance information received from an insurance sales 
agent or securities broker relating to the insurance. This new 
requirement in the Guide could provide parties with evidence that may 
be relevant in cases involving annuities.

Items Customers Would No Longer Be Required To Produce

    Claimants' complaints--The current Guide requires claimants to 
produce all prior complaints by or on behalf of the claimants involving 
securities matters and the firm's/associated persons' responses (see 
current List 2, Item 11). FINRA is proposing to delete this item as 
unnecessary because the respondent firm/associated persons would be in 
possession of such complaints and any responsive documents.
    Claimants' action to limit losses--The current Guide requires 
claimants to produce all documents showing action taken by the 
claimants to limit losses in the transactions at issue (see current 
List 2, Item 13). FINRA is proposing to delete this item because, in 
most instances, the firm/associated persons are in possession of any 
documents that would be responsive to this item. If necessary, firms 
would be able to request additional documents.

Conforming Changes

    FINRA is proposing to amend Rules 12506 (Document Production Lists) 
and 12508 (Objecting to Discovery; Waiver of Objection) to remove 
references to Lists three through 14 since FINRA would delete these 
lists in the proposed Guide.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\5\ 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 these revisions to the Guide will 
reduce the number and limit the scope of disputes involving document 
production and other matters, thereby improving the arbitration process 
for the benefit of the public investors, broker-dealer firms, and 
associated persons who use the process.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.

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 35 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

[[Page 45692]]

(ii) as to which the self-regulatory organization consents, the 
Commission will:
    (A) By order approve 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2010-035 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-2010-035. This 
file number should be included on the subject line if e-mail 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 a.m. and 3 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-2010-035 
and should be submitted on or before August 24, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18999 Filed 8-2-10; 8:45 am]
BILLING CODE 8010-01-P

