Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Amend FINRA Rule 12800 (Simplified Arbitration) To Clarify and Amend the Applicability of the Document Production Lists

October 28, 2024.

I. Introduction

On May 13, 2024, 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”) and Rule 19b-4 thereunder, a proposed rule change (SR-FINRA-2024-008) to amend FINRA Rule 12800 (Simplified Arbitration) of the FINRA Code of Arbitration Procedure for Customer Disputes (“Customer Code”). The proposed rule change, as subsequently modified by a partial amendment (“Partial Amendment No. 1”), would address the applicability of the lists of documents that are presumed to be discoverable in regular arbitrations between a customer and a member or associated person (“Document Production Lists”) to simplified customer arbitrations administered under FINRA Rule 12800.

The proposed rule change was published for public comment in the Federal Register on May 28, 2024. The public comment period closed on June 18, 2024. The Commission received comment letters related to this filing. On July 8, 2024, FINRA consented to an extension of the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to August 26, 2024. On August 7, 2024, FINRA responded to the comment letters received in response to the Notice and filed Partial Amendment No. 1 to modify the proposed rule change.

On August 27, 2024, the Commission published a notice of filing of Partial Amendment No. 1 and an order instituting proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Partial Amendment No. 1. The Commission received additional comment letters in response to the OIP. This order approves the proposed rule change, as modified by Partial Amendment No. 1 (hereinafter referred to as the “proposed rule change” unless otherwise specified).

II. Description of the Proposed Rule Change

A. Background

FINRA Dispute Resolution Services (“DRS”) provides a Discovery Guide to help guide the parties and arbitrators through the discovery process in customer arbitrations. The Document Production Lists, which are included in the Discovery Guide, outline presumptively discoverable documents that the parties should exchange, without arbitrator or DRS staff intervention.

Document Production Lists 1 and 2 describe the documents that are presumed to be discoverable in all arbitrations between a customer and a member firm or associated person, except in simplified customer arbitrations as explained below. List 1 outlines the documents that member firms and associated persons shall produce; List 2 outlines the documents that customers shall produce. The proposed rule change would affect the applicability of the Document Production Lists in simplified customer arbitrations.

There are three types of simplified customer arbitrations. If the customer does not request a hearing, the arbitrator will render an award based on the pleadings and other materials submitted by the parties (“paper cases”). If the customer requests a hearing, the customer must select between one of two hearing options, known as an Option One hearing and an Option Two hearing. If the customer requests an Option One hearing, the regular provisions of the Customer Code relating to prehearings and hearings apply (“regular hearing”), including the Document Production Lists. Alternatively, the customer may request an Option Two special proceeding, which is an abbreviated hearing (“special proceeding”).

Currently, the Document Production Lists do not apply in paper cases and special proceedings. Accordingly, the parties in such proceedings must request documents and other information from each other, pursuant to FINRA Rule 12800(g)(2). However, an arbitrator may exercise discretion to use relevant portions of the Document Production Lists in paper cases and special proceedings “in a manner consistent with the expedited nature of simplified proceedings.” Absent such an exercise of discretion by the arbitrator, in order to obtain discovery in these proceedings, the parties must request documents and other information from each other without the benefit of the Document Production Lists. As a result, no documents or information are presumptively discoverable in paper cases and special proceedings, but they are presumptively discoverable in simplified customer arbitrations in which the customer requests a regular hearing as noted above.

B. Proposed Rule Change

The proposed rule change would amend FINRA Rule 12800(g)(1) to give customers in paper cases and special proceedings the option to elect whether they want the Document Production Lists to apply to all parties.

Proposed Rule 12800(g)(1)(B) states that the Document Production Lists described in FINRA Rule 12506 would not apply in paper cases or special proceedings unless: (1) the customer requests that they apply at the time he or she initiates an arbitration pursuant to Rule 12302 (Filing and Serving an Initial Statement of Claim) or, (2) if the customer is a respondent, he or she requests that they apply no later than the answer due date pursuant to Rule 12303 (Answering the Statement of Claim), regardless of the parties' agreement to extend any answer due date.

If the customer does not timely elect to apply the Document Production Lists to all parties as provided, proposed Rule 12800(g)(1)(B) would continue to permit an arbitrator to exercise discretion to use relevant portions of the Document Production Lists in a manner consistent with the expedited nature of simplified customer arbitrations. Additionally, proposed Rule 12800(g)(2) would continue to permit the parties to request documents and information from each other.

III. Discussion of Commission Findings

After careful review of the proposed rule change, the comment letters, and FINRA's response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association. Specifically, as explained in more detail below, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, 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. The Commission addresses the proposed rule change's specific provisions, and any related comments, in turn.

Currently, the Document Production Lists do not apply in paper cases or in special proceedings. Accordingly, the parties in such proceedings must request documents and other information from each other, pursuant to FINRA Rule 12800(g)(2). The proposed rule change would amend FINRA Rule 12800(g)(1) to give customers in paper cases and special proceedings the option to elect at the time that they initiate an arbitration or, if they are a respondent, no later than the answer due date, whether they want the Document Production Lists to apply to all parties. If such an election is made, all parties would be required to produce the documents on the Document Production Lists, explain why the documents cannot be produced, or object to the production of the documents within the timeframes set forth in FINRA Rule 12506.

Commenters supported the proposed rule change. For example, commenters stated that applying the Document Production Lists to paper cases and special proceedings would generally protect investors, enhance the fairness of the proceedings and arbitration process, balance the need for efficiency and fairness, and enhance fairness without unduly raising costs. In addition, multiple commenters stated that the proposed changes would enhance pro se customers' awareness and understanding of the discovery process and support them in seeking material evidence necessary to their claims. Some commenters also suggested additional changes.

One commenter suggested changes to proposed Rule 12800(g)(1)(B) to give a customer who is a respondent more time to request application of the Document Productions Lists. As proposed, if the customer is a respondent, he or she must request that the Document Production Lists apply no later than the date he or she must answer a statement of claim pursuant to Rule 12303, regardless of the parties' agreement to extend any answer due date. The commenter suggested that when a customer respondent obtains an extension of time to answer, the customer should be allowed to opt in to the Document Production Lists when the customer files the answer pursuant to an agreed deadline extension, rather than on the original due date for the answer.

In response, FINRA stated that the proposed rule change “balances the expedited nature of simplified customer arbitrations and the ability of customer respondents to make an informed decision regarding whether to use the Document Production Lists.” For example, if a customer could request that the Document Production Lists apply when the customer respondent files the answer and the answer is not filed until just before the special proceeding hearing date, then “this would require the arbitrator and parties to reschedule the hearing date to a date at least two months later than originally scheduled to allow parties adequate time to respond to the Document Production Lists.” Similarly, allowing customer respondents to request that the Document Production Lists apply when filing the answer in a papers case rather than by the answer due date could significantly delay the conclusion of such cases, which are generally the most expedited form of arbitration case. Furthermore, FINRA stated that to the extent a customer respondent does not timely elect to apply the Document Production Lists to all parties, proposed Rule 12800(g)(1)(B) continues to allow the arbitrator discretion to use relevant portions of the Document Production Lists in a manner consistent with the expedited nature of simplified customer arbitrations. In addition, the parties can still request documents and information from each other pursuant to FINRA Rule 12800(g)(2). For these reasons, FINRA did not accept the suggested change.

Another commenter suggested that FINRA add a hyperlink or cross reference to the Discovery Guide within the rules whenever the Document Production Lists are mentioned to help investors locate and use FINRA guidance. This commenter also suggested that FINRA make guidance on its website easier to locate for parties in simplified arbitrations. Another commenter recommended that FINRA provide parties a “plain language explanation of the discovery process and how it will differ with use of the Discovery Guide.”

In response to the commenters' suggestions, FINRA: (1) updated the “Related Links” section of the web pages for FINRA Rules 12506, 12507, 12508, and 12800 to include a hyperlink to the Discovery Guide web page; (2) updated the FINRA Rule 12800 web page by adding hyperlinks to any cross-referenced FINRA Rules; and (3) updated its “Overview of Arbitration & Mediation” web page by adding a hyperlink to cross-reference its “Simplified Arbitrations” web page. In addition, FINRA stated that it would develop and publish guidance about discovery that will be available to all parties in simplified arbitration and would, among other things, direct parties to the Discovery Guide.

Finally, one commenter recommended providing and requiring more arbitrator training, including providing arbitrators greater discretion to award sanctions for discovery violations. Specifically, this commenter stated that enhanced training should provide arbitrators with sufficient detail on: (1) the requirements of parties when asserting objections; (2) the adequate bases for objections to overcome the presumption of discoverability; (3) how objections may lead to the risk that arbitrators do not have relevant documents and information to decide the case; and (4) the circumstances under which an arbitrator may award sanctions against parties who assert boilerplate objection.

In response, FINRA stated that it currently provides mandatory training and various other resources to arbitrators regarding the discovery process. For example, arbitrators must pass FINRA's Basic Arbitrator Training Program in order to serve on FINRA arbitration cases. The Basic Arbitrator Training Program includes a module dedicated to the discovery process. FINRA stated that this module also reminds arbitrators that pro se parties “may need more procedural direction and specific deadlines for discovery requests and responses.” Moreover, in order to qualify as a chairperson, arbitrators must complete training containing three modules with information about the discovery process and issues, including motions to compel discovery. In addition, DRS also offers voluntary, subject-specific training modules, including an online course titled “Discovery, Abuses and Sanctions” that focuses on the respective duties of arbitrators and parties in the discovery process. Further, FINRA stated that it also provides updates and reminders to arbitrators regarding discovery procedures via its Neutral Workshops and a quarterly newsletter, as well as the DRS Arbitrator's Guide, which dedicates two sections to discovery and motions. FINRA stated that in light of these available resources, it “does not anticipate providing additional arbitrator training on the discovery process at this time.”

Giving customers in paper cases and special proceedings the option to elect whether they want the Document Production Lists to apply to all parties at the time that they initiate an arbitration or, if they are a respondent, no later than the answer due date, should increase the efficiency of simplified arbitration proceedings while maintaining their expedited nature. By opting to use the Document Production Lists, parties should receive those documents and information that are relevant to the dispute without the need to make production requests or engage in motion practice, which should help expedite the discovery process. Furthermore, increased access to relevant documents and other information should result in outcomes ( i.e., awards and settlements) in paper cases or special proceedings that are more consistent with the merits of the case.

In addition, the proposed rule change should help facilitate the discovery process in arbitration cases. Because many of the customers who appear in simplified arbitration cases are pro se, they are more likely than customers in regular arbitration cases to lack familiarity with the discovery process. Giving customers in paper cases and special proceedings the option to elect whether they want the Document Production Lists to apply to all parties is, therefore, a reasonable approach to facilitating the discovery process for customers. FINRA also reasonably determined to decline giving customer respondents more time to request application of the Document Productions Lists. By requiring that a customer respondent request that the Document Production Lists apply no later than the answer due date pursuant to Rule 12303, rather than any extended answer due date agreed to by the parties, the proposed rule change reasonably balances providing respondent customers with time to determine whether to apply the Document Production Lists with the expeditious nature of simplified proceedings.

Further, in addition to the proposed rule change, FINRA has taken, and has stated that it will continue to take, measures that should further enhance awareness and transparency of the discovery process, as well as help customers evaluate whether to request application of the Document Production Lists. Specifically, FINRA updated its website to provide more direct access to FINRA guidance and rules related to simplified arbitration and the discovery process, including the Document Production Lists. In addition, FINRA stated that it will publish guidance about discovery that would assist customers in making informed decisions regarding whether to elect to use the Document Production Lists in their case. Moreover, the educational resources currently available to arbitrators should help ensure that arbitrators are well trained on the discovery process, including use of the Discovery Production Lists, so that they can foster simplified arbitration proceedings that are less susceptible to unsupported procedural objections regarding document production and that operate in a fair and expeditious manner. For these reasons, the proposed rule change is reasonably designed to protect investors and the public interest.

IV. Conclusion

The proposed rule change would provide customers in paper cases and special proceedings the option to elect whether they want the Document Production Lists to apply to all parties. In this way, the proposed rule change would facilitate discovery of the documents and information that are relevant to a customer's arbitration, and thereby enhance the arbitration process. The proposed rule change would also codify existing guidance stating that the Document Production Lists are applicable in simplified customer arbitrations in which the customer requests a regular hearing. Codifying this guidance would enhance parties' awareness and understanding of the discovery process in certain simplified customer arbitrations.

For the reasons set forth above, the Commission finds that the proposed rule change, as modified by Partial Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and, in general, protect investors and the public interest.

It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act that the proposed rule change (SR-FINRA-2024-008), as modified by Partial Amendment No. 1, be, and hereby is, approved.

[FR Doc. 2024-25425 Filed 10-31-24; 8:45 am]

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