[Federal Register Volume 84, Number 29 (Tuesday, February 12, 2019)]
[Notices]
[Pages 3518-3521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01946]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85063; File No. SR-FINRA-2019-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Expand
Time for Non-Parties To Respond to Arbitration Subpoenas and Orders of
Appearance of Witnesses or Production of Documents
February 6, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 29, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 12512(d) through (e) and
FINRA Rule 12513(d) through (e) of the Code of Arbitration Procedure
for Customer Disputes (``Customer Code'') and FINRA Rule 13512(d)
through (e) and FINRA Rule 13513(d) through (e) of the Code of
Arbitration Procedure for Industry Disputes (``Industry Code'' and
together, ``Codes''), to expand time for non-parties to respond to
arbitration subpoenas and orders of appearance of witnesses or
production of documents, and to make related changes to enhance the
discovery process for forum users.
The text of the proposed rule change is available at the principal
office of FINRA, on FINRA's website at http://www.finra.org, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Introduction
The proposed rule change would amend FINRA Rules 12512, 12513,
13512 and 13513 that govern procedures for non-parties to object to
subpoenas and for non-parties to object to arbitrator orders of
appearance of witnesses or production of documents. The proposed rule
change would help ensure that non-parties wanting to object to an order
or subpoena have sufficient time to do so. The proposal will also make
related changes to enhance the discovery process for forum users.
Background
In arbitration, the parties exchange documents and information to
prepare for the arbitration through the discovery process. The Codes
currently provide that parties in FINRA arbitration who seek discovery
from a non-party may request the panel to issue: (1) An order of
appearance of witnesses or production of documents if the non-party is
subject to FINRA's jurisdiction as an associated person or member firm
or (2) a subpoena if the non-party is not subject to FINRA's
jurisdiction.\3\ If the panel decides to issue the order or subpoena,
FINRA will transmit the signed order or subpoena to the moving party to
serve on the non-party. If a non-party receiving an order or a subpoena
objects to the scope or propriety of the order or subpoena, the non-
party may, within 10 calendar days of service of the order or subpoena,
file written objections through the Director of the Office of Dispute
Resolution (Director).
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\3\ See Rules 12512 and 12513. See also Rules 13512 and 13513.
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Concerns About Current Subpoena and Order Rules for Non-Parties
Forum users have raised concerns that the amount of time that non-
parties have to respond to orders and subpoenas is insufficient.\4\
Since non-
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parties do not have access to the Dispute Resolution Party Portal
(Party Portal),\5\ they are currently served using other means (first-
class mail, overnight mail service, overnight delivery service, hand
delivery, email or facsimile). Recipients of orders and subpoenas
reported that the individual at a non-party firm who is responsible for
responding to an order or subpoena (e.g., legal staff) may not actually
receive a copy of the order or subpoena through internal processes
until after the tenth day from service has passed, thereby causing the
non-party firm to risk waiving its ability to timely object to the
order or subpoena.\6\ As a non-party to the arbitration, a firm is not
able to anticipate the arrival of an order or subpoena and instruct
front line employees (e.g., receptionists or mail room personnel) to
route these high priority documents to the appropriate individual
responsible for responding to the discovery request. Once the objection
to an order or subpoena is waived, the non-party must respond to the
order or subpoena or risk incurring sanctions or disciplinary
action.\7\ Forum users have also raised concerns that the use of first-
class mail is not an ideal option in discovery because it is slow. For
these reasons, FINRA seeks to offer sufficient time for non-parties to
provide the order or subpoena to the appropriate individual who would
respond to the discovery request.
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\4\ See, e.g., Letter from Kevin M. Carroll, Managing Director
and Associate General Counsel, Securities Industry and Financial
Markets Association, to Jennifer Piorko Mitchell, Vice President and
Deputy Corporate Secretary, FINRA, dated June 2, 2017 (responding to
FINRA's March 2017 Special Notice on FINRA's engagement programs),
www.finra.org/sites/default/files/notice_comment_file_ref/SN-32117_SIFMA-KevinCarroll_comment.pdf.
\5\ The Party Portal provides arbitration forum users with a
secure, online location for claim filing and interactions relating
to case administration. Parties use the Party Portal to, among other
things, file claims, pay filing fees, receive documents from and
send documents to FINRA, receive service of claims, submit answers
to claims, submit additional case documents, view the status of
cases, select arbitrators, schedule hearings and send documents to
other Party Portal case participants.
\6\ See supra note 4.
\7\ See Rules 12212 and 12511. See also Rules 13212 and 13511.
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Proposed Rule Change
FINRA is proposing three amendments to the Codes to enhance the
discovery process for forum users, particularly non-parties. First,
FINRA is proposing to amend the Codes to extend the response time for
non-parties to object to an order or subpoena from 10 calendar days of
service to 15 calendar days of receipt of the order or subpoena.
Receipt of overnight mail service, overnight delivery service, hand
delivery, email or facsimile is accomplished on the date of delivery.
FINRA believes that the proposed rule change would address forum users'
concerns because the proposal would help ensure that non-parties
wanting to object to an order or subpoena have sufficient time to do
so.
Second, FINRA is proposing to amend the Codes to exclude first-
class mail as an option to serve documents on the non-party and as an
option for the non-party to file the objection to the scope or
propriety of the order or subpoena.\8\ FINRA believes that by requiring
forum users to serve or transmit discovery-related documents through
overnight mail service, overnight delivery, hand delivery, email or
facsimile, forum users are better able to confirm and facilitate the
timing of discovery obligations.
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\8\ Filing and service by first-class mail is accomplished on
the date of mailing, but it can take several days to confirm
receipt. For purposes of this rule proposal, service by overnight
mail, overnight delivery, hand delivery, facsimile or email is
accomplished on the date of delivery.
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Third, FINRA is proposing to amend the Codes to codify the current
practice that the Director sends, at the same time, objections and
responses to the panel after the reply date has elapsed, unless
otherwise directed by the panel. The Director sends the complete set of
motion papers to the panel to ensure that the panel receives the
advocacy positions of all parties at the same time. FINRA believes that
the proposed rule change will enhance forum users' understanding of
existing case administration procedures and will improve transparency
concerning forum operations.\9\
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\9\ FINRA notes that the proposed rule change would impact all
members, including members that are funding portals or have elected
to be treated as capital acquisition brokers (``CABs''), given that
the funding portal and CAB rule sets incorporate the impacted FINRA
rules by reference.
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If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 30 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\10\ which requires, among
other things, that FINRA rules must 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. FINRA believes that the proposed rule change would
enhance the discovery process for forum users by giving non-parties
additional time to respond to subpoenas and orders. Further, the
proposed rule change addresses forum users' concerns on delays with
first-class mail and would enhance their ability to confirm and
facilitate the timing of discovery obligations. FINRA further believes
that the proposed amendments would also enhance the user experience at
the forum by standardizing certain procedures relating to subpoenas and
orders and will improve transparency concerning forum operations.
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\10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. A discussion of the economic
impacts of the proposed rule change follows.
Economic Impact Assessment
FINRA staff has undertaken an economic impact assessment, as set
forth below, to analyze the regulatory need for the proposed rule
change, its potential economic impacts, including anticipated costs,
benefits, and distributional and competitive effects, relative to the
current baseline, and the alternatives FINRA considered in assessing
how to best meet its regulatory objectives.
(a) Regulatory Need
Under the Codes, non-parties to an arbitration have a limited
amount of time to object to an order or subpoena. Parties and non-
parties may also use options to transmit or serve documents that are
slow, further hindering the ability of non-parties to timely
object.\11\ This could cause non-parties to inadvertently waive their
ability to timely object. Non-parties for whom the objection process
would be valuable could incur costs associated with this outcome.
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\11\ See supra note 7.
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(b) Economic Baseline
The economic baseline for the proposed amendments are the Codes
that address the length of time for non-parties to respond to
arbitrators' orders and subpoenas. The economic baseline also includes
the Codes that address the options for parties and non-parties to serve
or transmit documents. The proposal is expected to affect non-parties
and parties to an arbitration.
Although FINRA does collect information describing orders and
subpoenas, FINRA does not collect information specifically identifying
orders or subpoenas to non-parties. The
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frequency in which parties currently request arbitrators to issue
orders or subpoenas to non-parties, and whether non-parties respond or
object, is therefore not available. Information is also not available
to describe the frequency in which non-parties inadvertently waive
their ability to timely object to an order or subpoena.
(c) Economic Impact
The proposed amendments would extend the response time for non-
parties to object to an order or subpoena. The proposed amendments
would also exclude first-class mail as an option to transmit or serve
documents. The benefits and costs of the proposed amendments are
discussed below.
The proposed amendments may benefit non-parties when responding to
orders and subpoenas. The proposed amendments would increase the amount
of time for non-parties to formulate sound objections and file these
objections with the Director and requesting party. Further, non-parties
that are able to timely object as a result of the proposed amendments,
and that receive a ruling in their favor, would not incur the costs
associated with the release of proprietary or non-public
information.\12\
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\12\ See supra note 4. The letter notes the potential release of
``proprietary, competitively-sensitive, or non-public personal
information'' as a result of the inability of non-parties to timely
object to an order or subpoena. Non-parties would also not incur the
costs to appear as a witness or to produce documents that are in
excess of the reasonable amount paid as reimbursement by the
requesting party.
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The proposed amendments, however, may impose costs on requesting
parties. Non-parties that are able to timely object as a result of the
proposed amendments, and that receive a ruling in their favor, would
not appear as a witness or produce documents. Requesting parties that
would otherwise receive the information may be less able to present a
case in arbitration and receive an award in their favor. This potential
cost, however, is dependent on whether the information would have
affected the arbitrators' award decision.\13\
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\13\ If arbitrators rule in favor of non-parties with respect to
the scope or propriety of the order or subpoena, then the
information would not likely increase the ability of the requesting
parties to present a case in arbitration and receive an award in
their favor. Requesting parties, however, would not incur the costs
of non-parties to appear as a witness or to produce documents.
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The proposed amendments may have countervailing effects on the
efficiency of the arbitration forum. The increase in the amount of time
for non-parties to respond may lengthen the discovery phase of the
arbitration proceedings, and therefore the amount of time until the
resolution of the dispute. The exclusion of first-class mail as an
option to transmit or serve documents, however, may increase the speed
of delivery as well as the ability of parties to determine the sequence
and timing of discovery. Whether the forum becomes more or less
efficient as a result of the proposed amendments is dependent on the
number of additional days non-parties take to file an objection to an
order or subpoena, as well as the extent to which parties and non-
parties transition to more efficient means of communication.
The proposed amendments may also have additional economic impacts.
For example, the exclusion of first-class mail may impose additional
costs on parties and non-parties that transition to a different, more-
expensive option to transmit or serve documents. The proposed
amendments would also codify the current practice whereby FINRA holds
all documents from objections and responses to orders or subpoenas
before sending them at one time after the reply date has elapsed
(unless otherwise directed by the panel). FINRA does not believe,
however, that any economic impact from the clarification of procedures
would be material.
(d) Alternatives Considered
The alternatives considered to the proposed amendments include not
extending the response time for non-parties to object to an order or
subpoena, or extending the response time but for a different number of
days. Other alternatives considered include not excluding first-class
mail as an option for transmitting or serving documents, or excluding
different options.
FINRA considered the benefits to non-parties from extending the
response time to object to an order or subpoena with the potential
increase in the amount of time for discovery. FINRA also considered the
benefits from excluding options to transmit or serve documents with the
costs of reducing the number of options. FINRA believes that the
proposed amendments increase the ability of non-parties to timely
object to an order or subpoena, as well as the efficiency of the
discovery process, while minimizing the potential costs to parties and
non-parties.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2019-004 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2019-004. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such
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filing also will be available for inspection and copying at the
principal office of FINRA. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2019-004
and should be submitted on or before March 5, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01946 Filed 2-11-19; 8:45 am]
BILLING CODE 8011-01-P