Legal Alert: FINRA Announces Effective Date for Discovery Guide Amendments and Provides Insight on Current Initiatives and Trends in Securities Arbitration

by Eversheds Sutherland (US) LLP

In its just-issued Regulatory Notice 13-40, the Financial Industry Regulatory Authority (FINRA) announced that the Discovery Guide Amendments recently approved by the U.S. Securities and Exchange Commission (SEC) will become effective December 2, 2013. In addition, FINRA Dispute Resolution personnel, including FINRA Dispute Resolution President and Director of Arbitration Linda Fienberg recently provided insight on current issues and trends in securities arbitration at the Practising Law Institute’s Securities Arbitration 2013 seminar. Many of the rule changes and initiatives discussed at the seminar have been subsequently approved by the SEC, and the current status of these rules and initiatives is incorporated into the discussion below.

Changes to the Discovery Guide to Address E-Discovery, Product Cases and Affirmations

The SEC recently approved FINRA’s rule proposals amending the Discovery Guide to provide guidance on e-discovery, product cases and affirmations. The amendments will become effective on December 2, 2013, for all customer cases filed on or after the effective date. FINRA has developed comprehensive arbitrator training materials on e-discovery and product cases to assist arbitrators with resolving discovery disputes involving these issues.


The amended Discovery Guide emphasizes cooperation between the parties on e-discovery issues and encourages parties to “discuss the form(s) in which they intend to produce documents. . . and, whenever possible, agree to the form(s) of production.” Parties are required to produce electronic files in a “reasonably usable format,” defined as “the format in which a party ordinarily maintains a document, or. . . a converted format that does not make it more difficult or burdensome for the requesting party to use in connection with the arbitration.”

The Discovery Guide instructs arbitrators to consider the totality of the circumstances when resolving disputes about the form of production of documents and provides arbitrators with a non-exhaustive list of factors to consider when deciding whether electronic files are in a reasonably usable format. Notably, an arbitrator may order a different form of production in order to address the cost or burden of producing electronic documents.

Product Cases

The amended Discovery Guide includes a section on “product cases,” defined as a case in which “one or more of the asserted claims center around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities.” The amended Discovery Guide sets forth how discovery in product cases differs from other customer cases, noting, for example, that the volume of documents tends to be greater and the documents are not client-specific. The amended Discovery Guide provides general guidelines about the types of documents parties may request in product cases. It points out that the Document Production Lists “may not provide all of the documents that parties usually request in a product case” and reiterates that “parties are not limited to the documents enumerated in the Document Production Lists.”


The amended Discovery Guide adds language clarifying that a party may request an affirmation when an opposing party makes a partial production, in addition to those cases where a party does not produce any documents. The amended language, moreover, requires a party to state in its affirmation the sources searched in that party’s attempt to locate responsive documents.

Arbitrator Selection Method in Customer Cases

FINRA’s proposed amendments to Rule 12403 have been approved by the SEC and are now effective. The new rule sets forth a single method for selecting arbitrators for customer cases heard by three arbitrators and eliminates the dual method set forth under the previous version of the rule. Significantly, a customer is no longer required to inform FINRA within 35 days of service of the Statement of Claim if the customer would like the option of having his or her case heard by an all-public panel. A party may now choose an all-public panel by striking all of the arbitrators on the non-public list. If a party wishes to have the case heard by a non-public arbitrator, that party may limit its strikes on the non-public list and rank some of the arbitrators. Doing so, however, does not guarantee that a non-public arbitrator will be appointed to the panel. When the parties have collectively stricken all of the non-public arbitrators or the ranked arbitrators are not available, FINRA will appoint to the panel the next highest ranked public arbitrator from the parties’ consolidated rankings. Under these circumstances, if the parties agree that they wish to have the panel include a non-public arbitrator, they can ask FINRA for a supplemental list of non-public arbitrators for ranking.

Motions to Vacate

FINRA has been working to minimize motions to vacate arbitration awards based on an arbitrator’s failure to disclose material information. Examples of these efforts include expanding FINRA’s arbitrator oath information, expanding information to be disclosed on the arbitrator disclosure sheet, transmitting mass emails to arbitrators, publishing articles on disclosure in The Neutral Corner, and providing to arbitrators examples of cases where an award has been vacated due to an arbitrator’s failure to disclose material information.

FINRA has recently taken additional steps to ensure that parties are aware of material information about arbitrators well before a hearing. When appointing a panel, FINRA staff members now conduct Google searches on the arbitrators to determine whether there is material information that an arbitrator has failed to disclose. If so, FINRA will instruct the arbitrator to disclose the information. If the arbitrator refuses to do so, the arbitrator will not be assigned to the case. FINRA will also review its arbitrator roster annually to make sure it contains current information.

Short List Option in Lieu of “Cram-Down” Arbitrators

FINRA has a short list option for selecting replacement arbitrators. This option is available to parties to avoid the appointment of arbitrators via “cram-down” or, what FINRA refers to as, “extended list appointments.” “Cram-downs” occur when an arbitrator withdraws from a panel, there are no arbitrators available that were ranked on the parties’ original arbitrator lists, and FINRA appoints a replacement arbitrator with no input from the parties.

The short list option provides the parties with the opportunity to have some control over the appointment of replacement arbitrators. If the parties agree to use the short list option, FINRA provides the parties with a list of three arbitrators, prescreened by FINRA for availability and conflicts, for the parties to rank. Each side is limited to one strike.

In those cases where an arbitrator becomes unavailable within five days of the scheduled hearing, parties may choose the short list option only if they agree to postpone the hearing. FINRA is considering submitting a proposed rule that would make the short list option the required method for appointing replacement arbitrators except in those instances when an arbitrator becomes unavailable within five days of the hearing.

Expungement Initiatives

FINRA anticipates filing a proposed rule that would establish an In re expungement proceeding for registered representatives who are not named in underlying arbitrations. Under the proposal, respondent firms would still be able to request expungement on behalf of unnamed registered representatives. Representatives would also have an opportunity to seek expungement through a separate In re proceeding. Although the parties to the underlying arbitration would receive notice of and would have an opportunity to appear at the expungement proceeding, they would not be parties to that proceeding. The proceeding would be heard by a single arbitrator who, whenever possible, served on the panel for the underlying arbitration.

The anticipated rule proposal would also establish an expedited expungement procedure for those cases in which an award in the underlying arbitration has been issued. In those cases, the unnamed representative would be provided notice of the award and an opportunity to ask the panel from the underlying case whether the panel has enough information to grant expungement. The panel would be able to respond that it has enough information to grant expungement or that it does not have enough information. The panel would not be able to deny expungement. If the panel does not have enough information to make a decision, the unnamed representative would be able to file an In re proceeding. Rules 12805 and 2080 would continue to be the standard for granting expungement.

In addition to the forthcoming rule proposal, FINRA is seriously looking at other issues such as the standard for granting expungement and the types of information the panel must review in an expungement proceeding. As part of this initiative, FINRA has recently issued a Notice to Arbitrators and Parties on Expanded Expungement Guidance.

Future Trends

FINRA is not likely to take a position on whether firms should be allowed to have mandatory pre-dispute arbitration agreements, but it will continue to have rules that set forth the permissible content of such agreements. FINRA will continue to support the position that the FINRA forum is fair to all parties, particularly investors. Investors currently pay less than 25% of the cost of an arbitration proceeding. Moreover, Rule 12200 permits investors to require a firm to arbitrate a dispute even if there is no arbitration agreement. FINRA will continue to support this rule, even if it comes under attack based on the argument that arbitration is a matter of contract. Finally, FINRA will likely be proposing rules within the next year to further clarify the issue of who can serve as a public arbitrator.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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