Newly-Revised FINRA Discovery Guide Takes Effect May 16, 2011

4/26/2011

FINRA has announced that the SEC has approved a revised Discovery Guide (the “Guide”) applicable to customer cases in FINRA securities arbitration cases [1].  These changes, which will apply to claims instituted after May 16, 2011, are a major update to the current Guide enacted in 1999 and mark the culmination of a six-year reform process.  The revised Guide features changes not only to the format, but also includes substantive changes that expand the scope and number of presumptively discoverable documents.

1.           Format Changes

The most apparent change in the revised Guide is the format.  While the current Guide separates discoverable documents and information into 14 “document lists,” the revised Guide seeks to simplify this process by reducing these lists to two general lists.  These two lists itemize the list of discoverable documents into those to be produced by (1) firms and (2) customers.  Addressing concerns that such a one-size-fits-all approach may not be applicable in all situations, the revised Guide emphasizes that Arbitrators retain the flexibility to order productions of documents not provided for in the lists, to refuse to compel productions of documents provided for in the lists, and to alter the production schedule.

2.          Expanded Scope

In addition to simplifying the document lists, the revised Guide also changes the substance and scope of presumably discoverable documents.  One key revision involves the clarification that electronic files are considered ‘documents’ within the meaning of the Guide.  Other notable additions to documents now presumed discoverable by a claimant include:

–          The production of telephone logs related to the claimant’s transactions;

–          All advertising materials sent to customers of the firm that refer to the securities and/or account types at issue or that were used to solicit and provide services to the claimant;

–          All customer complaints filed against the associated person(s) assigned to the accounts at issue for the three years prior to the statement of claim;

–          A larger scope of documents relating to the associated person(s)’s disciplinary history;

–          Documents evidencing trading or investment strategies utilized/recommended in the claimant’s account;

–          The associated person(s)’s compensation for the transactions at issue.

Additionally, the revised Guide also enlarges the scope of documents discoverable by the member firm, including:

–          Research report(s) claimants received from the firm;

–          All non-confidential settlements claimant(s) entered in civil actions involving securities matters and/or securities arbitration proceedings;

–          All documents the claimant received related to the investments at issue;

–          All materials received by claimant or obtained from any source relating to the transactions or products at issue;

–          All correspondence related to the accounts at issue (not just correspondence with the firm).

Finally, the revised Guide also limits the production of documents currently discoverable.  Member firms are no longer required to produce holding pages, or account statements/confirmations for the claimant(s) accounts and transactions at issue.  Additionally, claimant(s) are no longer required to produce prior complaints involving securities matters and the firm’s response, or documents showing actions claimant(s) took to limit losses in the transaction at issue.

3.          Be Prepared

             The revised Guide becomes applicable to all customer cases filed on or after May 16, 2011.  Broker dealers should ensure that their current procedures for responding to a newly-filed customer case are in full compliance with the changes set forth.  This includes the retention of documents and correspondence that are part of the newly discoverable documents in the revised Guide.  It is essential that a proactive approach is taken in implementing these changes to avoid any unnecessary delays.

 Jordan Maglich is an associate whose practice areas include securities arbitration matters, complex business litigation, and financial litigation.   For questions or comments about this article, please contact Jordan at 813-347-5100. 

[1]http://www.finra.org/web/groups/arbitrationmediation/@arbmed/@arbtors/documents/arbmed/p123494.pdf