In November 2013, the Financial Industry Regulatory Authority(FINRA) issued Regulatory Notice 13-40 which highlights the recentapproval by the Securities and Exchange Commission (SEC) ofamendments to the Discovery Guide used in customer arbitrationproceedings. These amendments, which became effective for allcustomer cases filed on or after December 2, 2013, significantlyalter the existing discovery standards for securities claims.Professionals handling these claims will benefit by understandingthree key components of the amendment's impact.

First, the amended guide provides guidance on resolvingelectronic discovery (e-discovery) disputes. Second, theamendments clarify the circumstances under which a party mayrequest an affirmation when an opposing party does not producedocuments. Third, the amendments explain how “product cases” aredifferent from other customer cases and describe the type ofdocuments that parties typically request in productcases.

For background, FINRA sponsors an arbitration forum whereby mostdisputes brought by retail public customers in the securitiesindustry are adjudicated. The FINRA arbitration system does notexpressly impose upon its arbitration panels the Rules of CivilProcedure from the federal courts or the relevant state courts.Rather, the arbitrators are typically given discretion to decidediscovery related issues with limited guidance from FINRA. The onenotable exception in this regard has been the various versions ofthe Discovery Guide which set forth, among other things,standardized lists of documents considered presumptivelydiscoverable. These amendments to the Discovery Guide are the firstsignificant changes to the guide since May 16, 2011.

Form of Production

With respect to e-discovery, the amended Discovery Guide nowincludes a section titled “form of production,” whereby parties areencouraged to discuss the forms in which they intend to producedocuments and, whenever possible, agree to the form of production.However, parties must produce electronic files in a “reasonablyusable format.”

As noted by the amendment, “the term reasonably usable formatrefers, generally, to the format in which a party ordinarilymaintains a document, or to a converted format that does not makeit more difficult or burdensome for the requesting party to use inconnection with the arbitration.” Arbitrators are also givenguidance as to resolving contested motions relating to the form ofproduction, and are instructed to consider the totalityof the circumstances including whether the chosen form ofproduction is different from the form in which a document isordinarily maintained.

For documents that must be obtained from a third party,arbitrators consider whether the chosen form of production isdifferent from the form in which the third party provided it. Inregard to documents converted from their original format,arbitrators consider a party's reasons for choosing a particularform of production, how the documents may be affected by theconversion to a new format, and whether the requesting party'sability to use the documents is diminished by a change in thedocuments' appearance, searchability, metadata, ormaneuverability.

Expanded Affirmation

The amended Discovery Guide also provides additional guidance asto affirmations in the event a party does not produce documentsspecified in the document production list. Originally, the guidespecified that when a party responds that there are no responsivedocuments, upon the request of the party seeking the documents, anaffirmation must be executed stating that a good faith search forthe requested documents was conducted—including a description ofthe extent of the search—and state (based upon the search) thatthere are no requested documents in the party's possession, custodyor control. This language has now been slightly expanded to requireaffirmations in situations involving a partial production. If aparty does not produce a document specified in a list item, therequesting party may ask for an affirmation in writing indicatingthat the party conducted a good faith search for the requesteddocument. The party is also required in the affirmation to statethe sources searched.

Guidance on Product Cases

Finally, FINRA amended the Discovery Guide's introduction to addguidance on product cases. As explained by regulatory Notice 13-40,product cases are unique customer cases that differ from others inseveral ways. In particular, a product case is one in which one ormore of the asserted claims centers around allegations regardingthe wide spread mis-marketing or defective development of aspecific security or specific group of securities. This item isparticularly relevant given the recent wave of FINRA arbitrationsinvolving real estate based private placements such as tenant incommon (TIC) interests and real estate investment trusts(REIT). In these types of arbitrations, claimants typicallyallege a systemic failure to conduct adequate due diligence on theproduct itself, failure to provide full and balanced disclosure ofboth risk and rewards, failure to implement appropriate internalcontrols, and failure to train registered persons regarding thefeatures, risks and suitability of these products.

The amended Discovery Guide explains that the two existingdocument production lists may not provide all of the documents thatparties typically request in a product case relating to a firm'screation of a product, due diligence reviews of a product, trainingon or marketing of a product, or post-approval review of a product.The guide also now emphasizes that parties are not limited to thedocuments enumerated in the lists; however, when parties do notagree on whether a case is a product case, the arbitrator may askthe parties to explain their rationale for that assertion. It isimportant to also note that FINRA does provide additional guidanceto arbitrators in determining whether a specific matter is aproduct case, as they are differentiated from other customer casesin the following ways:

1. The volume of documents tends to be much greater.

2. Multiple investor claimants may seek the samedocuments.

3. The documents are not client specific.

4. The product at issue is more likely to be the subject ofa regulatory investigation.

5. The cases are more likely to involve a class action withdocuments subject to a mandatory hold.

6. The same documents may have been produced to multipleparties in other cases involving the same security or toregulators.

7. Documents are more likely to relate to due diligenceanalysis performed by persons who did not handle the claimant'saccount.

In challenging whether the arbitration constitutes a productcase, parties should be prepared to address whether any of theseseven items apply to the arbitration before the panel. To be clear,the amended guidelines only apply to customer arbitrationproceedings and do not apply to intra-industry cases.

Providing useful guidance as to the parameters of permissiblediscovery in public customer arbitrations has been an ongoing taskfor FINRA for more than a decade. The scope of permissiblediscovery has been a topic of renewed discussion culminating inthese most recent amendments. Professionals handling securitiesclaims must be cognizant of these changes and diligent in managingthese claims to avoid potential pitfalls that may arise at thediscovery stage.