Monday, December 9, 2013

FINRA Amends the Discovery Guide...Again

FINRA Dispute Resolution runs the largest arbitration forum for the resolution of securities disputes in the country. Virtually every customer-broker dispute is resolved at FINRA, which makes their rules regarding arbitration an important consideration for anyone involved in a dispute.

In 1999 FINRA adopted what it called a Discovery Guide, a series of lists of documents which were presumptively discoverable in specific classes of cases. The Discovery Guide was overhauled in 2011. FINRA has announced another Discovery Guide amendment, which will be effect for cases filed after December 2, 2013.

The Guide, which is often controversial, was an attempt to streamline the discovery process, but in doing so, it shifted the burden of proof in a discovery dispute from the party making the request, to the party receiving the request. Customers complained that their financial records had to be turned over to the other side in every case, firms complained about turning over internal policy documents, personnel files and similar documents.

The reality is that as time went on, the process did become streamlined, and while a Guide will never remove discovery disputes, many category of documents have been removed from such disputes. There is no doubt that there are some individual items in the Guide that are troublesome, but  in those instances, the parties have the ability to file and objection and make an argument to the Chair of the arbitration panel.

Last week FINRA made two new additions to the Discovery Guide - one for electronic discovery, and the other for product cases. The first should not bee too controversial, and conforms to the way these issues aer handled in practice. The second is going to create some issues, as it vastly expands the discovery obligations of broker-dealers in cases where a particular product or security is at issue - such as the Lehman Note Cases against UBS, or the Auction Rate Securities case, or any of the private placement cases of recent years.


The guide’s introduction states that electronic files are documents within the meaning of the guide and that arbitrators decide any disputes that arise about the form in which a party produces a document. FINRA amended the guide to provide that parties are encouraged to discuss the form in which they intend to produce documents and, whenever possible, to agree to the form of production. The provision requires parties to produce  electronic files in a “reasonably usable format.” The term reasonably usable format refers, generally, to the format in which a party ordinarily maintains a document, or to a converted  format that does not make it more difficult or burdensome for the requesting party to use  in connection with the arbitration.

The guide instructs arbitrators who are resolving contested motions about the form of production, to consider the totality of the circumstances, including, among other matters, the following three factors:

  • for documents in a party’s possession or custody, whether the chosen form of production is different from the form in which a document is ordinarily maintained;
  • for documents that must be obtained from a third party (because they are not in a party’s possession or custody), whether the chosen form of production is different from the form in which the third party provided it; and
  • for documents converted from their original format, a party’s reasons for choosing a particular form of production; how the documents may be affected by the conversion to a new format; and whether the requesting party’s ability to use the documents is diminished by a change in the documents’ appearance, searchability, metadata or maneuverability.

Product Cases

FINRA amended the guide’s introduction to add guidance on product cases. Product cases are unique customer cases that differ from other customer cases in several ways. The amended text provides that a product case is one in which one or more of the asserted claims centers around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities. It enumerates some of the ways that product cases are different from other customer cases, including that:

  • the volume of documents tends to be much greater;
  • multiple investor claimants may seek the same documents;
  • the documents are not client specific; 
  • the product at issue is more likely to be the subject of a regulatory investigation; 
  • the cases are more likely to involve a class action with documents subject to a mandatory hold;
  • the same documents may have been produced to multiple parties in other cases involving the same security or to regulators; and
  • documents are more likely to relate to due diligence analyses performed by persons who did not handle the claimant’s account.

The new Discovery Guide explains that the two existing Document Production Lists may not provide all of 
the documents parties typically request in a product case relating to these issues, and emphasizes that, in a product  case, parties are not limited to the documents enumerated in the lists. 

The new Discovery Guide will create new issues and new areas of dispute within the arbitration process. Readers care cautioned to choose their arbitration counsel wisely, as securities arbitration is not the typical arbitration process. For questions about the process, or about securities arbitration in general, call our office at 212-509-6544.

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