FINRA Proposes Discovery Guide Amendments Concerning E-Discovery, Product Cases, And Document Search Affirmations

June 06, 2013

On June 3 FINRA sent to the SEC proposed changes to its customer arbitration Discovery Guide and Document Production Lists. See FINRA’s filing here. Those changes concern electronic discovery, investment product cases, and party affirmations concerning unsuccessful or partially successful searches for requested documents.

The changes result from FINRA’s consultation with the Discovery Task Force FINRA created in the wake of the 2011 amendments to the Discovery Guide. The Task Force operates under the auspices of FINRA’s National Arbitration and Mediation Committee and consists of four public members (including three former PIABA presidents) and three industry members. FINRA requested the Task Force to review e-discovery issues and discovery for investment product cases.

The proposed changes amend the introduction to the Guide and do not change either of the Guide’s Document Production Lists.

E-Discovery. The 2011 amendments to the Guide included the addition of language expressly providing that electronic files are “documents.” The proposed changes address the “form of production” for electronic files. Mirroring language used in Rule 34 of the Federal Rules of Civil Procedure and associated Advisory Committee Notes, the amendments state that parties must produce electronic files in a “reasonably usable format,” generally, “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 during a proceeding.”

The proposal explains that converting a document from its native format can affect the document’s “appearance,” “searchability,” “metadata” and “maneuverability.” For example, a hard copy of a Microsoft PowerPoint® presentation might not contain speaker notes that appear in the electronic file (“appearance”). A hard copy of a Microsoft Word® document may not be searchable (“searchability”). Converting a native file may limit the availability of metadata showing how, when and by whom the file was created, accessed or modified (“metadata”). When a Microsoft Excel® spreadsheet is produced in hard copy, the requesting party will be unable to sort and filter the data (“maneuverability”).

The proposal recognizes, however, that “parties have legitimate reasons” for converting documents into different formats and for requesting a particular format. On the one hand, for example, a firm may need to convert a document in order to redact personal confidential information. On the other hand, a customer “may need a document to contain metadata in order to establish when a broker learned specific information.” Although the FINRA filing gives only this broker-focused example, there are clearly scenarios in which a customer’s metadata could be relevant. The proposal states that it is possible to produce “some, but not all” metadata associated with a native file.

The amendments provide for case-by-case flexibility. When resolving motions concerning the form of production, arbitrators must consider the “totality of the circumstances,” including the following three factors:

  1. 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;
  2. 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
  3. For documents converted from their original format, a party’s reason(s) 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.

The amendments also provide that arbitrators can order a different form of production in light of cost and burden considerations. See I. C. Warshauer, “Electronic Discovery,” FINRA, The Neutral Corner, Vol. 2-2011 (“E-discovery and its costs should be reasonably proportional to the amount at stake. . . . The concept of proportionality is particularly important in FINRA arbitrations.”). See also FINRA’s online arbitrator “Discovery, Abuses and Sanctions” training module, the “Electronic Discovery” portion of which refers arbitrators to the Federal Judicial Center’s “Managing Discovery of Electronic Information: A Pocket Guide for Judges” (2007). That Pocket Guide includes a discussion (at 13-14) of “Form of Production,” and (at 6-12) of Federal Rule of Civil Procedure 26(b)(2)(B) and (C), which concern burden and expense of production of electronically stored information (and of other discovery).

Product Cases. FINRA requested that the Discovery Task Force review perceived special concerns about discovery in arbitrations in which the claims arise from investment products issues (as opposed to point of sale/sales practice issues). The proposed amendments would add a “Product Cases” section to the Guide’s introduction. The addition starts with a definition of “product cases” as “cases 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 amendments acknowledge that parties may disagree on whether a case is in fact a “product case” and that arbitrators may need to resolve this issue when deciding which if any additional documents a party must produce.

The discussion of discovery in product cases concerns only production by firms/associated persons. FINRA elected not to add any product case items to the firm/associated person Document Production List because the “[s]taff was mindful of the economic impact on firms that is associated with the larger volume of documents in product cases.”

Instead, the proposed language consists of “general guidelines on the types of documents that customers typically request in products cases because general guidelines would encourage parties to discuss their discovery needs and would encourage arbitrators to be flexible when making a determination on whether to order additional production.” Those “general guidelines” consist of the following list: “documents relating to, among other things, a firm’s: creation of a product; due diligence reviews of a product; training on or marketing of a product; or post-approval review of a product.” While documents on the Document Production Lists are “presumptively discoverable,” something less than a presumption applies to these “general guideline” documents. FINRA’s online arbitrator “Discovery, Abuses and Sanctions” training module now includes the suggestion that production of such documents “may or may not” be appropriate in arbitrations concerning “non-conventional investments.”

When deciding whether to compel production of such documents pursuant to a customer’s additional document request, FINRA apparently intends that arbitrators should take into account ways that product cases are different from other customer cases, as enumerated in the proposed Discovery Guide language:

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

When deciding such a motion to compel, the panel also should take into account the “cost or burden of production,” as discussed elsewhere in the Guide’s introduction. See also Customer Code of Arbitration Procedure Rule 12508(c) (“In making any rulings on objections, arbitrators may consider the relevance of documents or discovery requests and the relevant costs and burdens to parties to produce this information.”). See generally Federal Rule of Civil Procedure 26(b)(2)(C)(iii) (“On motion or on its own, the court must limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it determines that: . . . the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.”).

Enumerated product case differences Nos. 2, 3 and 6 highlight two reasons such discovery may be of concern to firms. First, claimants’ counsel will often want to use such discovery in other cases. They may resist confidentiality stipulations or orders that limit use to the case in which the documents were produced. Second, claimants will seek to use the discovery “shortcut” of simply requesting respondents’ production in other cases or production in response to regulatory requests.

Affirmations. The Guide’s introduction provides for affirmations when a party indicates there are no responsive documents in the party’s possession, custody or control. FINRA states that arbitration participants have voiced two concerns about this provision:

  • The language creates a “loop hole” in which parties might assert that they are only required to provide an affirmation relating to production when no documents are produced, as opposed to situations where there is partial production.
  • Parties might affirm that they did not find documents where they looked as opposed to looking for documents in all appropriate places.

Under the proposal, an affirmation would be required “[i]f a party does not produce a document specified in a List item on the applicable Document Production List, upon the request of the party seeking the document that was not produced.” The affirmation—by “the customer or the appropriate person in the brokerage firm who has knowledge”—would have to “[state] affirm in writing that the party conducted a good faith search for the requested document[s]; 2) describe the extent of the search including, but not limited to, stating the sources searched; and 3) state that, based on the search, the party does not have the requested document [there are no requested documents] in the party’s possession, custody, or control” (additions to existing version underlined, deletions in brackets).

The proposed language does not disturb the distinction in this provision between documents specified in the Discovery Guide Document Production Lists—as to which a request from the party seeking the document is sufficient to trigger the requirement to provide an affirmation—and documents sought by an additional document request—as to which only an arbitrators order will give rise to an obligation to provide an affirmation. As before, the affirmation provision does not by its terms apply to third-party recipients of discovery requests (as is true of the Discovery Guide in general: “The Discovery Guide . . . serves as a guide for the parties and the arbitrators”). (Nor do recently amended Customer Code of Arbitration Procedure Rules 12512 (Subpoenas) and 12513 (panel orders directing appearance or production) provide for affirmations by third parties.)


The SEC will be noticing a comment period for the proposed Discovery Guide changes. FINRA customer arbitration participants with any concerns about the proposed changes should make those concerns known to the SEC. As to product cases, potential concerns could include, among others, uncertainty as to what constitutes a bona fide “product case”; the lack of balance implied in the assertion that “the volume of documents tends to be much greater” in product cases, and the “one way” discussion of production in product cases. As to e-discovery, although the proposal does not mandate any particular form of production, the guidance could be improved by more clearly stating that production in full native format is not required and that other formats (such as formats that allow Bates-numbering) may be acceptable and preferable in many cases.


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This article was originally published by Bingham McCutchen LLP.