New FINRA Discovery Rules Effective in 2014

April 15, 2014
The Frost Firm

The Financial Industry Regulatory Authority (“FINRA”) is the largest independent securities regulator in the U.S.  It provides investor protection, and maintains market integrity via enforcement actions and the resolution of both intra-industry and broker-client disputes.

Recently, it has updated it’s Discovery Guide that governs discovery in FINRA dispute resolutions/arbitration.

In 1999, FINRA adopted a “Discovery Guide” to assist in the resolution of these disputes.  The Discovery Guide is intended to streamline the discovery process by providing a series of lists defining presumptively discoverable documents.  This shifted the burden of proof in a discovery dispute to the party receiving the request.  Ultimately, this led to increased customer complaints about financial information disclosures, and firm complaints about the release of internal documents and/or confidential information.

In 2011, FINRA’s Discovery Guide was overhauled in an attempt to address some of these concerns, and in December, 2013, another FINRA amendment to the Discovery Guide became effective.  FINRA “believes that the proposed revisions to the Guide will reduce the number and limit the scope of disputes involving document production in customer cases, thereby improving the arbitration process for the benefit of public investors, broker-dealer firms, and associated persons.”  For the various formats of the discovery guide can be obtained from FINRA, here.

The amendment provides general guidance in three main areas: e-discovery, product cases, and affirmations.


FINRA’s amended Discovery Guide now states in its introduction that parties are encouraged to discuss the form in which they intend to produce documents and, whenever possible, to agree to the form of production.

Moreover, arbitrators will now be able to order different forms of document production for the reduction of the discovery burden.  Arbiters retain the ability to narrow the time frame and scope of discovery, as well as determining alternative, substitute documents.

FINRA’s amendment also requires parties to produce electronic files in a “reasonably usable format.”   This prevents the production of documents in an arcane or proprietary format.  This standard refers “to the format in which a party ordinarily maintains a document, or to a converted format that does not make it more difficult or burdensome for the requesting party to use in connection with the arbitration.”

Finally, FINRA’s amendment encourages arbitrators to resolve discovery disputes under a “totality of the circumstances” framework, which lists three additional factors:

1. Whether the chosen form of production is different from the form in which a document is ordinarily maintained;
2. 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. A party’s reasons for choosing a particular form of production
b. How the documents may be affected by the conversion
c. If the requesting party’s ability to use the documents is diminished by a change in the documents’ appearance, searchability, metadata or functionality.

Product Cases

FINRA’s Discovery Guide amendment has a new updated product cases section.  This creates a variety of discoverable documents for these types of cases.

Product cases, as defined by FINRA, are where “one or more of the asserted claims centers around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities.”  Parties disagreeing on whether a case is a product case may ask arbitrators to determine the issue.


Finally, FINRA’s amendment provides additional guidance for affirmations when a party indicates that there are no responsive documents in the party’s possession, custody or control.

FINRA has amended the affirmation language to clarify that an affirmation may be requested when an Party makes a partial production.  Now, the customer or the appropriate person at the brokerage firm who has knowledge “must affirm in writing that the party conducted a good faith search for the requested document,” including the sources searched, and then affirmatively state that the party does not have the requested document.

If you have questions or need assistance with your legal matter in California or nationwide, including Client or Broker FINRA Arbitrations or alternative dispute resolution, our experienced attorneys can assist you.  Please contact us, or set up an appointment at our San Diego offices.