
[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Notices]
[Pages 19155-19160]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8200]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64166; File No. SR-FINRA-2010-035]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Amendments to the Discovery Guide and 
Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer 
Disputes

April 1, 2011.

I. Introduction

    On July 12, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change 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 proposed rule change was 
published for comment in the Federal Register on August 3, 2010.\3\ The 
Commission received 55 comment letters on the

[[Page 19156]]

proposed rule change.\4\ On February 8, 2011, the Commission received 
from FINRA a Response to Comments and Partial Amendment No. 1 to the 
proposed rule change.\5\ The Commission is publishing this notice and 
order to solicit comment on Amendment No. 1 and to approve the proposed 
rule change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 62584 (July 28, 2010), 75 FR 
45685 (August 3, 2010).
    \4\ See comment letters submitted by Richard A. Stephens, Esq., 
dated August 6, 2010 (``Stephens comment''); Seth E. Lipner, Esq., 
Baruch College, Member, Deutsch & Lipner, dated August 15, 2010 
(``Lipner comment''); Leonard Steiner, Esq., dated August 16, 2010 
(``Steiner comment''); Robert C. Port, Esq., Cohen Goldstein Port 
Gottlieb, LLP, dated August 19, 2010 (``Port comment''); Steven M. 
McCauley, Esq., dated August 19, 2010 (``McCauley comment''); Steven 
B. Caruso, Esq., Maddox Hargett & Caruso, P.C., dated August 20, 
2010 (``Caruso comment''); Diane Nygaard, Esq., dated August 20, 
2010 (``Nygaard comment''); Ryan K. Bakhtiari, Esq., Aidikoff, Uhl 
and Bakhtiari, dated August 20, 2010 (``Bakhtiari comment''); Thomas 
R. Cox, Esq., Miller, Canfield, Paddock and Stone, P.L.C., dated 
August 20, 2010 (``Cox comment''); Steven J. Gard, Esq., dated 
August 22, 2010 (``Gard comment''); John W. Shaw, Esq., Berkowitz, 
Oliver, Williams, Shaw and Eisenbrandt, dated August 23, 2010 
(``Shaw comment''); Stephen Krosschell, Esq., Goodman & Nekvasil, 
P.A., dated August 23, 2010 (``Krosschell comment''); David P. 
Neuman, Esq., Stoltmann Law Offices, P.C., dated August 23, 2010 
(``Neuman comment''); Theodore A. Krebsbach, Esq., Krebsbach and 
Snyder, P.C., dated August 23, 2010 (``Krebsbach comment''); Eric G. 
Wallis, Esq., Reed Smith LLP, dated August 23, 2010 (``Wallis 
comment''); Herb Pounds, Jr., Esq., dated August 23, 2010 (``Pounds 
comment''); Alan S. Brodherson, Esq., dated August 24, 2010 
(``Brodherson comment''); Joseph Terry, dated August 24, 2010 
(``Terry comment''); Mark James, dated August 24, 2010 (``James 
comment''); Jonathan W. Evans, Esq., and Michael S. Edmiston, Esq., 
Law Offices of Jonathan W. Evans & Associates, dated August 24, 2010 
(``Evans and Edmiston comment''); G. Kirk Ellis, Esq., dated August 
24, 2010 (``Ellis comment''); Jason R. Doss, Esq., The Doss Firm, 
LLC, dated August 24, 2010 (``Doss comment''); Jenice L. Malecki, 
Esq., Malecki Law, dated August 24, 2010 (``Malecki comment''); 
Frances Ruby, dated August 24, 2010 (``Ruby comment''); Carrie L. 
Chelko, Esq., Deputy General Counsel, Janney Montgomery Scott LLC, 
dated August 24, 2010 (``Janney comment''); Raymond W. Henney, Esq., 
Honigman Miller Schwartz and Cohn LLP, dated August 24, 2010 
(``Henney comment''); Jonathan Kord Lagemann, Esq., dated August 24, 
2010 (``Lagemann comment''); Brian N. Smiley, Esq., Smiley Bishop & 
Porter, LLP, dated August 24, 2010 (``Smiley comment''); Stanley 
Yorsz, Esq., Buchanan Ingersoll & Rooney PC, dated August 24, 2010 
(``Yorsz comment''); Dominick F. Evangelista, Esq., Bressler, Amery 
& Ross, P.C., dated August 24, 2010 (``Evangelista comment''); 
Michael N. Ungar, Esq., Kenneth A. Bravo, Esq., Joseph S. Simms, 
Esq., and Jill Y. Coen, Esq., Ulmer & Berne LLP, dated August 24, 
2010 (``Ulmer & Berne comment''); Barry D. Estell, Esq., dated 
August 24, 2010 (``Estell comment''); Richard A. Lewins, Esq., dated 
August 24, 2010 (``Lewins comment''); Robert M. Rudnicki, Esq., Vice 
President and Director of Litigation, Raymond James & Associates, 
Inc., on behalf of Raymond James Financial, Inc. and Raymond James & 
Associates, Inc., dated August 24, 2010 (``Raymond James comment''); 
Lee H. Schillinger, dated August 24, 2010 (``Schillinger comment''); 
Paula D. Shaffner, Esq., Stradley Ronon Stevens & Young, LLP, dated 
August 24, 2010 (``Shaffner comment''); Kelly J. Moynihan, Esq., 
Keesal, Young & Logan, dated August 24, 2010 (``Moynihan comment''); 
Richard L. Martens, Esq., Jason S. Haselkorn, Esq., Patricia M. 
Christiansen, Esq., Charles L. Pickett, Esq., Casey Ciklin Lubitz 
Martens & O'Connell, dated August 24, 2010 (``Casey Ciklin 
comment''); Peter J. Mougey, Esq., Levin Papantonio Thomas Mitchell 
Rafferty & Proctor, P.A., dated August 24, 2010 (``Mougey 
comment''); Rob Bleecher, Esq., dated August 24, 2010 (``Bleecher 
comment''); Scott R. Shewan, Esq., President, Public Investors 
Arbitration Bar Association, dated August 24, 2010 (``PIABA 
comment''); Bradford D. Kaufman, Esq., Greenberg Traurig, P.A., 
dated August 24, 2010 (``Kaufman comment''); William A. Jacobson, 
Esq., Associate Clinical Professor, Cornell Law School, and 
Director, Cornell Securities Law Clinic, dated August 24, 2010 
(``Cornell Securities Law Clinic comment''); S. Lawrence Polk, Esq., 
Sutherland Asbill & Brennan LLP, dated August 24, 2010 (``Polk 
comment''); John R. Cronin, Vermont Securities Director and Chair, 
NASAA Arbitration Project Group, dated August 25, 2010 (``NASAA 
comment''); Theodore M. Davis, Esq., dated August 25, 2010 (``Davis 
comment''); Eliot Goldstein, Esq., Law Offices of Eliot Goldstein, 
LLP, dated August 25, 2010 (``Goldstein comment''); Richard M. 
Layne, Esq., dated August 26, 2010 (``Layne comment''); Royal B. 
Lea, Esq., dated August 27, 2010 (``Lea comment''); Keith L. 
Griffin, Esq., Griffin Law Firm, LLC, dated August 27, 2010 
(``Griffin comment''); Patricia Cowart, Esq., Chair, SIFMA 
Arbitration Committee, dated September 10, 2010 (``SIFMA comment''); 
Gail E. Boliver, Esq., Boliver & Bidwell, dated September 16, 2010 
(``Boliver comment''); Scott C. Ilgenfritz, Esq., Johnson, Pope, 
Bokor, Ruppel & Burns, LLP, dated September 24, 2010 (``Ilgenfritz 
comment''); Matthew Farley, Esq., Drinker Biddle & Reath LLP, dated 
September 24, 2010 (``Drinker Biddle comment''); and Kathy A. 
Besmer, dated November 6, 2010 (``Besmer comment'').
    \5\ See letter from Margo A. Hassan, Assistant Chief Counsel, 
FINRA Dispute Resolution, to Elizabeth Murphy, Secretary, 
Commission, dated February 8, 2011 (``Response Letter''). The text 
of the proposed rule change and FINRA's Response Letter are 
available on FINRA's Web site at http://www.finra.org, at the 
principal office of FINRA, on the Commission's Web site at http://www.sec.gov, and at the Commission's Public Reference Room.
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II. Description of Proposed Rule Change and Summary of Comments

    As described in Exchange Act Release No. 62584,\6\ 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 Customer Code. Of the 55 comments received on the initial 
proposal, 15 supported it with modifications,\7\ 36 opposed it,\8\ and 
4 addressed particular aspects of the proposal without expressing a 
position on whether the Commission should approve the proposed rule 
change.\9\
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    \6\ See note 3 supra.
    \7\ See Caruso, Bakhtiari, Cox, Pounds, Doss, Malecki, Smiley, 
Lewins, Raymond James, Mougey, PIABA, Cornell Securities Law Clinic, 
SIFMA, Boliver, and Ilgenfritz comments.
    \8\ See Lipner, Steiner, Port, McCauley, Nygaard, Gard, Shaw, 
Neuman, Krebsbach, Krosschell, Brodherson, Terry, James, Evans and 
Edmiston, Ellis, Ruby, Janney, Lagemann, Yorsz, Evangelista, Ulmer & 
Berne, Estell, Schillinger, Shaffner, Moynihan, Casey Ciklin, 
Bleecher, Kaufman, NASAA, Davis, Goldstein, Layne, Lea, Griffin, 
Drinker Biddle, and Besmer comments.
    \9\ See Stephens, Wallis, Henney, and Polk comments.
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    In its Response Letter, FINRA stated that the initial proposed rule 
change reflected several years of close consultation with FINRA's 
constituents, including investor and industry representatives, 
arbitrators, and attorneys that handle investor claims at securities 
arbitration clinics. FINRA also stated that, because the Discovery 
Guide, as amended by the initial proposed rule change, was comprised of 
language that was discussed at length with these constituents and 
crafted to balance the parties' discovery needs with the goal of 
keeping FINRA arbitration efficient and cost effective, FINRA was, for 
the most part, making only limited further revisions to the proposed 
rule change to provide additional clarification and guidance.\10\
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    \10\ Response Letter.
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    In addition, FINRA stated that, if the Commission approves the 
proposed rule change as amended, it would establish a Discovery Task 
Force under the auspices of FINRA's National Arbitration and Mediation 
Committee to review substantive issues relating to the Discovery Guide 
on an ongoing basis, for the purpose of keeping the Discovery Guide 
current as products change and new discovery issues arise.\11\ FINRA 
stated that it would convene the Discovery Task Force approximately six 
months after implementing the revised Discovery Guide to allow 
practitioners time to gauge the efficacy of the new Discovery 
Guide.\12\
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    \11\ Id.
    \12\ Id.
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    FINRA's responses to comments and changes to the proposed rule 
change made by Amendment No. 1 are described below.

A. Guide Introduction

1. Arbitrator Discretion
    Commenters expressed concerns that arbitrators may adhere strictly 
to the Discovery Guide's two lists of documents (the first itemizing 
categories of documents to be produced by firms and their associated 
persons, and the second itemizing categories of documents to be 
produced by customers--together, ``Lists'') when making discovery 
decisions and may not use the flexibility the Discovery Guide provides 
to them.\13\ FINRA responded that it wants arbitrators to be aware of 
the flexibility they have when

[[Page 19157]]

asked to decide discovery disputes, and therefore the initial proposal 
included revisions to the introduction of the Discovery Guide stating 
that arbitrators may order production of documents not appearing on the 
Lists, and that arbitrators can order that parties do not have to 
produce all items on the Lists in a particular case.\14\ Further, these 
revisions added guidance on how arbitrators should handle objections 
based on cost or burden of production.\15\
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    \13\ See Lipner, Krebsbach, Evans and Edmiston, Shaffner, 
Bleecher, Griffin, Henney, NASAA, Yorsz, Goldstein, SIFMA, and 
Drinker Biddle comments.
    \14\ Response Letter.
    \15\ Id.
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    In addition to these changes, and in response to commenters' 
concerns, FINRA has proposed changes to the introduction to explain 
that arbitrators must use their judgment in considering requests for 
documents beyond those contained in the Lists and may not deny document 
requests on the grounds that the documents are not expressly listed in 
the Discovery Guide.\16\ FINRA stated that, in addition to expanding 
the language in the Discovery Guide, if the SEC approves the proposed 
rule change, FINRA would revise the Arbitrator's Reference Guide, which 
is posted on the FINRA Web site, to include a discussion on how 
arbitrators should use the new Discovery Guide.\17\ FINRA also stated 
that it would update its arbitrator training materials to ensure that 
FINRA makes arbitrators aware of the revisions.\18\ In addition, FINRA 
stated that it would offer training on the revised Discovery Guide in a 
workshop that FINRA would post as an audio file on its Web site if the 
proposed rule change, as amended, is approved.\19\
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    \16\ Id.
    \17\ Id.
    \18\ Id.
    \19\ Id.
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2. Business Models and Types of Customer Claims
    FINRA initially proposed adding language to the introduction of the 
Discovery Guide stating that parties and arbitrators should recognize 
that not all firms have the same business models and 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 taken into consideration.\20\ Commenters requested that 
FINRA add ``clearing firm'' to the parenthetical listing examples of 
business models.\21\ FINRA agrees that adding ``clearing firm'' to the 
parenthetical would be helpful to parties and arbitrators and has 
amended the proposed language of the parenthetical accordingly.\22\ 
FINRA is also proposing in that same paragraph to replace the phrase 
``be relevant in'' with the phrase ``apply to'' because ``apply to'' 
would more precisely convey the intended meaning of the sentence.\23\ 
In addition, commenters asked for new language indicating that items on 
the Customer List may not apply in a particular case depending on the 
claims asserted.\24\ FINRA agrees that adding such guidance regarding 
customer claims would be helpful, and has amended the proposed rule 
change accordingly.\25\
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    \20\ See note 3 supra.
    \21\ See SIFMA and Drinker Biddle comments. The Drinker Biddle 
comment also asked FINRA to add ``prime-brokerage firm'' to the 
parenthetical. FINRA believes that adding ``clearing firm'' to the 
parenthetical will add sufficient clarity for the Guide's users and 
is not proposing to add ``prime-brokerage firm'' at this time.
    \22\ Response Letter.
    \23\ Id.
    \24\ See PIABA and Caruso comments.
    \25\ Response Letter.
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    In the initial proposed rule change, FINRA included language 
stating that electronic files are ``documents'' within the meaning of 
the Discovery Guide.\26\ Commenters suggested that FINRA should include 
additional guidance concerning electronic files.\27\ FINRA responded 
that it understands that issues relating to electronic discovery are 
becoming more prevalent and intends to recommend that the Discovery 
Task Force include the topic on its agenda.\28\ However, FINRA is not 
proposing any additional revisions concerning electronic discovery at 
this time.
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    \26\ See note 3 supra.
    \27\ See Yorsz and Martens comments.
    \28\ Response Letter.
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3. Privilege
    Several commenters raised concerns that List items might require 
production of privileged documents.\29\ One commenter suggested that 
parties raise objections based on unspecified or unrecognized 
privileges.\30\ Based on these comments, FINRA believes that additional 
guidance on acceptable grounds for assertions of privilege would be 
helpful to parties and arbitrators, and is proposing to add language to 
the introduction stating that parties are not required to produce 
documents that are otherwise subject to an established privilege, 
including the attorney-client privilege and attorney work product 
doctrine.\31\
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    \29\ See Krosschell, Pounds, Evans and Edmiston, Schillinger, 
PIABA, Polk, Layne, SIFMA, Drinker Biddle, and Janney comments.
    \30\ See Estell comments.
    \31\ Id.
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4. Enforcing Document Production
    Commenters raised concerns about arbitrators not adequately 
enforcing the discovery rules, including through reluctance to impose 
sanctions for party failure to comply with discovery rules.\32\ FINRA 
believes that the appropriate places to address the arbitrators' duty 
to enforce discovery requirements are the Code of Arbitration Procedure 
and FINRA's training materials.\33\ FINRA stated that it trains 
arbitrators concerning the discovery rules and available sanctions.\34\ 
FINRA also stated that, to reinforce the training, it had included a 
discussion in the revised Arbitrator's Reference Guide (which FINRA 
indicated would be posted to FINRA's Web site in the near future) that 
addresses discovery obligations and discusses sanctions.\35\
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    \32\ See Krebsbach, Lewins, PIABA, and Boliver comments.
    \33\ Response Letter.
    \34\ Id.
    \35\ Id.
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B. Document Production Lists

1. Eliminating the Discovery Guide
    Several commenters asserted that FINRA should eliminate the 
Discovery Guide.\36\ FINRA disagreed with the commenters and stated 
that experience with the current Discovery Guide since its inauguration 
in 1999 indicates that the Discovery Guide and its Lists help parties 
obtain the documents they need to develop a case.\37\ FINRA believes 
that the proposed rule change, which incorporated user feedback after 
years of experience with the Discovery Guide, will improve the 
discovery process for customers, and for firms and their associated 
persons.\38\
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    \36\ See Lipner, McCauley, Gard, Terry, Evans and Edmiston, and 
Bleecher comments.
    \37\ Response Letter.
    \38\ Id.
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2. Production Burden
    Several commenters expressed the view that document production 
under the Guide is burdensome to investors.\39\ Others raised concerns 
about the burdens imposed on firms and their associated persons.\40\ 
FINRA stated that it created the Discovery Guide to facilitate the 
exchange of the kinds of documents that parties routinely sought during 
discovery and that arbitrators regularly ordered produced. FINRA also 
stated that the proposed revisions reflect experience gained over the 
years since FINRA implemented the Discovery Guide.\41\ In addition, 
FINRA stated that

[[Page 19158]]

balancing the desire to provide parties with the documents they need to 
prepare their cases with a desire to minimize production burdens is 
challenging, but, based on years of experience with the Discovery Guide 
and constituent feedback, FINRA believed that the proposed rule change, 
as amended, would strike an appropriate balance.\42\
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    \39\ See Lipner, McCauley, Neuman, Krebsbach, James, Evans and 
Edmiston, Doss, Ruby, Smiley, Estell, Mougey, Bleecher, NASAA, 
Davis, Layne, and Ilgenfritz comments.
    \40\ See Cox, Krebsbach, Janney, Evangelista, Ulmer & Berne, 
SIFMA, and Drinker Biddle comments.
    \41\ Response Letter.
    \42\ Id.
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3. Two List Format
    Several commenters objected to FINRA's proposal to consolidate the 
Lists from 14 claim-specific lists to two general Lists (one for firms 
and their associated persons, and one for customers) citing, among 
other objections, additional production burdens and the potential for 
producing documents that are not needed in every case.\43\ FINRA stated 
that it proposed the consolidation in response to suggestions from 
advocates for customers that FINRA eliminate the Lists for specific 
types of claims because customers are not required to plead causes of 
action under the Customer Code.\44\ FINRA also stated that, along with 
consolidating the Lists, FINRA proposed expanding the guidance it gives 
to arbitrators in the Discovery Guide's introduction on how to handle 
discovery issues so that arbitrators understand that they may tailor 
the Discovery Guide to unique circumstances that arise in arbitration 
cases.\45\ FINRA stated that the consolidation would better serve forum 
users and ultimately reduce the number and limit the scope of disputes 
involving document production.\46\
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    \43\ See Port, Cox, Shaw, Krebsbach, Brodherson, Janney, Yorsz, 
Shaffner, Martens, Ulmer & Berne, and SIFMA comments.
    \44\ FINRA stated that it proposed to update the Discovery Guide 
in 2008, and, although the 2008 proposal was withdrawn, FINRA 
incorporated many suggestions made in comments on that proposal, 
including the suggestion that FINRA consolidate the lists, in the 
current proposal. See Response Letter.
    \45\ Response Letter.
    \46\ Id.
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4. Time Periods and Scope of Production
    Several commenters objected to the time periods specified in the 
proposed consolidated List items.\47\ FINRA responded by stating that 
investor and industry representatives that collaborated with FINRA on 
the proposed rule change considered each List item on its own merits 
and discussed, over several meetings, the time periods for each 
item.\48\ FINRA explained that, given the effort that went into 
determining appropriate time periods for production, FINRA was not 
proposing to change any of the time periods in the proposed rule 
change.\49\ FINRA also stated that the Discovery Task Force may choose 
to revisit the time periods for production of certain documents after 
forum users have gained experience with the revised Discovery 
Guide.\50\
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    \47\ See Stephens, Caruso, Krosschell, Pounds, Evans and 
Edmiston, Smiley, Ulmer & Berne, Estell, Raymond James, Shillinger, 
Shafner, Mougey, PIABA, Cornell Securities Law Clinic, Davis, 
Goldstein, Layne, SIFMA, Boliver, and Drinker Biddle comments. 
Commenters asserted, among other objections, that time periods were 
too short, or too long, or were not consistent between customers and 
firms/associated persons.
    \48\ Response Letter.
    \49\ Id.
    \50\ Id.
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5. Product Cases
    Several commenters raised concerns that the Guide does not 
sufficiently address claims alleging the defective structuring or 
widespread mismarketing of a specific security, or ``product cases.'' 
\51\ One commenter expressed the belief that the Guide should not 
address specific products.\52\ FINRA responded by stating that it 
believes product cases are an appropriate subject for the Discovery 
Task Force, and that it intends to suggest that the Task Force consider 
the topic further.\53\
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    \51\ See Lipner, Bakhtiari, Malecki, Mougey, and Goldstein 
comments.
    \52\ See Krebsbach comments.
    \53\ Response Letter.
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6. Distinguishing Customer Parties From Other Customers
    Commenters asked FINRA to revise the proposed List items to 
distinguish between customers that are parties to a case and other, 
non-party customers.\54\ FINRA agreed that making such a distinction in 
the proposed List items would add clarity to the Discovery Guide.\55\ 
FINRA has accordingly amended the proposed preamble to the Lists to 
state that, throughout the Lists, FINRA will refer to customers that 
are parties to an arbitration case as ``customer parties'' and other, 
non-party customers as ``customers.'' \56\
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    \54\ See SIFMA and Raymond James comments.
    \55\ Response Letter.
    \56\ Id.
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7. Accounts or Transactions at Issue
    Several proposed List items called for a firm or associated person 
to produce documents relating to the accounts or transactions at 
issue.\57\ Upon further consideration, FINRA has amended the proposed 
rule change by specifying that, in addition to documents relating to 
the accounts or transactions at issue, these items cover documents 
relating to the claims, and products or types of products, at 
issue.\58\
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    \57\ See List 1, items 2, 7, 9, 11, 12, 13, and 17.
    \58\ Response Letter.
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C. Individual List Items

    In addition to the amendments described above, FINRA has made a 
number of revisions to the proposed rule change that are specific to 
individual items on the Lists.
1. List 1, Item 2
    As initially proposed, this item would have called for production 
of all correspondence sent to customers or received by firms and their 
associated persons specifically relating to the accounts or 
transactions at issue including, but not limited to, documents relating 
to asset allocation, diversification, trading strategies, and market 
conditions; and all advertising materials sent to customers of the firm 
that refer to the securities or account types at issue.\59\ Unless 
separately requested, the documents would not have included 
confirmation slips and monthly statements.
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    \59\ See note 3 supra.
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    FINRA has made several changes to this proposed item that FINRA 
believes would clarify the item's application and provide additional 
guidance to parties and arbitrators.\60\ As amended, the item would 
require production of all correspondence sent to the customer parties 
or received by the firm or its associated persons that relate to the 
claims, accounts, transactions, or products or types of products at 
issue including, but not limited to, documents relating to asset 
allocation, diversification, trading strategies, and market conditions; 
and all advertising materials sent to customers of the firm that refer 
to the products or account types that are at issue or that were used by 
the firm or its associated persons to solicit or provide services to 
the customer parties. In addition, if requested, the documents would 
include confirmation slips and monthly statements. Even if not 
requested, the documents would include confirmation slips and monthly 
statements that have handwritten notations or that are not identical to 
those the firm sent to the customer parties.
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    \60\ Response Letter.
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2. List 1, Item 4
    Currently, for claims alleging unauthorized trading, the Discovery 
Guide presumes that firms will produce order tickets for the customers' 
transactions at issue. FINRA initially proposed to delete this 
requirement on

[[Page 19159]]

the grounds that 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. 
Several commenters objected to the proposed deletion and stated, among 
other things, that order tickets provide evidence of whether a trade 
was solicited or unsolicited, evidence of whether a trade was reviewed 
and approved by supervisory personnel, and evidence of the time that an 
order was entered.\61\ FINRA found the comments persuasive, and has 
amended the proposed item to restore the presumption that firms will 
produce order tickets for the customer parties' transactions at issue 
in cases alleging unauthorized trading.\62\ FINRA believes that the 
arbitrators can effectively address issues of production burden on a 
case-by-case basis.\63\
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    \61\ See Stephens, Caruso, Nygaard, Krosschell, Evans and 
Edmiston, Schillinger, Layne, and Pounds comments.
    \62\ Response Letter.
    \63\ Id.
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3. List 1, Item 5(a)
    As initially proposed, this item would have provided for production 
of all materials that the firm or its associated persons prepared, used 
or provided to customers relating to the transactions or products at 
issue, including research reports, sales materials, performance or risk 
data, prospectuses, and other offering documents, including documents 
intended or identified as being ``for internal use only.'' \64\ In 
response to comments, FINRA is proposing to amend the proposed item to 
clarify its intended scope by specifying that the documents include 
copies of news articles or outside research.\65\
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    \64\ See note 3 supra.
    \65\ See Response Letter. Cf. Estell comments (relating to news 
articles or outside research).
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4. List 1, Item 6
    As initially proposed, this item would have required production of 
all notes the firm or its associated persons made, including, but not 
limited to, entries in any diary or calendar, relating to the customers 
or the customers' accounts or transactions at issue.\66\ For clarity, 
FINRA has amended this proposed item to require production of all notes 
the firm or its associated persons made relating to the customer 
parties or the customer parties' claims, accounts, transactions, or 
products or types of products at issue, including, but not limited to, 
entries in any diary or calendar, relating to the claims or products at 
issue.\67\
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    \66\ See note 3 supra.
    \67\ Response Letter.
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5. List 1, Item 7(a)
    As initially proposed, this item would have required production of 
all notes or memoranda evidencing supervisory, compliance, or 
managerial review of the customers' accounts or trades therein for the 
period at issue.\68\ FINRA has amended this proposed item to expand the 
guidance provided to parties and arbitrators by requiring production of 
all notes or memoranda evidencing supervisory, compliance, or 
managerial review of the customer parties' accounts or transactions 
therein or of the associated persons assigned to the customer parties' 
accounts for the period at issue.\69\
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    \68\ See note 3 supra.
    \69\ Response Letter.
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6. List 1, Item 14
    As initially proposed, this item would have required production of 
portions of internal audit reports for the branch in which the 
customers maintained accounts that ``focused on'' associated persons or 
the accounts or transactions at issue.\70\ FINRA has amended this item 
to clarify its intended scope by replacing ``focused on'' with 
``concern.'' \71\
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    \70\ See note 3 supra.
    \71\ Response Letter. Cf. Estell comments (relating to the term 
``focused on'').
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7. List 1, Item 15
    As initially proposed, this item would have required production of 
records of disciplinary action taken against a firm's associated 
persons by any regulator or employer for all sales practice violations 
or conduct similar to the conduct alleged in the Statement of 
Claim.\72\ FINRA has amended this proposed item to clarify its intended 
scope by including the same parenthetical reference to ``state, federal 
or self-regulatory organization'' that FINRA uses in other items in the 
Discovery Guide that refer to regulators.\73\
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    \72\ See note 3 supra.
    \73\ Response Letter.
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8. List 2, Item 1
    As initially proposed, this item (relating to customer tax 
documents) would have stated that customers may redact information 
relating to medical and dental expenses and the names of charities on 
Schedule A of their tax return unless the information is related to the 
allegations in the Statement of Claim.\74\ The proposed statement was 
followed by language indicating that income tax returns must be 
identical to those that were filed with the Internal Revenue 
Service.\75\ To add clarity to the proposed item, FINRA has amended it 
by moving the sentence indicating that tax returns must be identical so 
that it appears immediately above the statement permitting redaction of 
the returns.\76\
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    \74\ See note 3 supra.
    \75\ Id.
    \76\ Response Letter.
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9. List 2, Item 4
    This item concerns the customers' accounts at firms that are not 
parties to the matter. For clarity, FINRA has amended the proposed item 
by distinguishing between non-party firms and party firms.\77\
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    \77\ Id.
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10. List 2, Item 8
    This item relates to telephone records. In the initial proposed 
rule change, FINRA stated that it was not proposing any substantive 
changes to the Discovery Guide's application to telephone records.\78\ 
In response to comments regarding that statement, FINRA offered a 
clarification.\79\ FINRA states that, under the current Discovery 
Guide, customers are required to produce certain documents relating to 
telephone records only if they are alleging unauthorized trading.\80\ 
In contrast, proposed item 8 would require customers to produce the 
specified documents in every case, which is more than a ministerial 
change.\81\
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    \78\ See note 3 supra.
    \79\ Response Letter. In its comment, PIABA questioned whether 
there was an error in the rule text of List 2, Item 8(b) because it 
did not limit production to claims alleging unauthorized trading.
    \80\ Response Letter.
    \81\ Id.
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11. List 2, Item 17
    As initially proposed, this item would have required production of 
documents showing the customers' complete educational and employment 
background or, in the alternative, a description of the customers' 
educational and employment background if not set forth in resumes 
produced under item 16.\82\ FINRA has amended this proposed item by 
revising it to require production of any existing description of the 
customer parties' educational and employment background if not set 
forth in resumes produced under item 16.
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    \82\ See note 3 supra.
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12. List 2, Item 19
    This item concerns insurance products that provide a death benefit. 
As initially proposed, it would have

[[Page 19160]]

required customers to produce all insurance information received from 
an insurance sales agent or securities broker relating to such 
insurance.\83\ FINRA has amended the proposed item to clarify its 
intended scope by deleting the reference to ``insurance'' before 
``information.'' \84\
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    \83\ See note 3 supra.
    \84\ Response Letter.
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III. Commission's Findings

    After careful review of the proposed rule change, the comment 
letters and the FINRA Response Letter, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association.\85\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\86\ which requires, among 
other things, that FINRA rules 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.
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    \85\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \86\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the revisions to the Discovery Guide 
will help 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. The revisions 
to the Discovery Guide are the result of over six years of consultation 
by FINRA with its constituents. The Commission also expects that 
further improvement of the process should be possible through the 
Discovery Task Force's consideration of discovery issues as they 
arise.\87\
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    \87\ Cf. Response Letter (describing plans for further 
consideration of issues by the Discovery Task Force).
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IV. Accelerated Approval

    The Commission finds goods cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\88\ for approving the proposed rule change, as 
modified by Amendment No. 1 thereto, prior to the 30th day after 
publication of notice of the filing of Amendment No. 1 in the Federal 
Register. The proposed rule change was informed by FINRA's 
consideration of, and the incorporation of many suggestions made in, 
extensive comments on a 2008 proposal to update the Discovery Guide, 
and Amendment No. 1's modifications to the proposed rule change add 
clarity to the Discovery Guide and provide additional guidance to 
parties and arbitrators.
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    \88\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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 April 27, 2011.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\89\ that the proposed rule change (SR-FINRA-2010-035), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \89\ 15 U.S.C. 78s(b)(2).
    \90\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\90\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8200 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P


