Notice to Parties - Discovery Rules and Procedures

The timely exchange of relevant documents and information between parties to FINRA arbitrations is vital to the efficient, cost-effective resolution of disputes. Recently, complaints from parties regarding possible abuses of the discovery process in FINRA arbitrations have been on the rise. This trend suggests that some parties believe that noncompliance with the discovery process is a routine and acceptable part of arbitration strategy. It is not.

The purpose of this Notice is to remind all parties—claimants and respondents—that failure to comply with the forum's discovery rules and procedures can result in sanctions, including dismissal of a claim, defense or proceeding.

Possible sanctions include:

 

• Assessing monetary penalties payable to one or more parties;
• Precluding a party from presenting evidence;
• Making an adverse inference against a party;
• Assessing postponement and/or forum fees;
• Assessing attorneys' fees, costs and expenses; and
• Dismissal of a claim, defense or proceeding.

 

In addition, members and associated persons who fail to comply with a discovery order of the panel may be referred to FINRA Enforcement for possible disciplinary action, which can include suspension or termination of FINRA membership or registration. You may contact the FINRA Investor Complaint Center for more information.

Exchange of Documents in Customer Dispute Cases

Rule 12505 of the Customer Code requires that parties to FINRA arbitrations cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration.

The Discovery Guide and Document Production Lists are designed for customer disputes with firms and Associated Person(s). The Document Production Lists specifically identify which documents parties to customer disputes should exchange before the hearing. Document Production Lists 1 and 2 apply to all customer disputes, while Lists 3 through 14 apply to specific types of customer dispute claims. (For example, Lists 4 and 5 apply to cases involving churning allegations.)

Unless the parties agree otherwise, they must give each other copies of all documents in their possession or control that are on Document Production Lists 1 or 2, and any other lists applicable to the dispute, within 60 days of the date that the answer to the claim is due. This exchange should happen automatically, without arbitrator or staff intervention. See Rules 12506 and 12507 of the Customer Code for more information on time frames for turning over documents.

If any party objects to the production of any document listed in the relevant Document Production Lists, the party must file a written objection on or before the date that the exchange of documents is due to occur. Objections should set forth the reasons the party objects to producing the documents. An objection to the production of a document or a category of documents is not an acceptable reason to delay the production of any document not covered by the objection. The arbitrators will decide whether disputed documents must be exchanged, and resolve any other issues, including requests for confidential treatment of documents. See Rule 12508 of the Customer Code for more information on objections.

Rule 12506(b)(2) of the Customer Code establishes a good faith standard for the exchange of documents and information; requiring that a party must use its best efforts to produce all documents required or agreed to be produced.

Parties may also request documents or information not on the Document Production Lists. Parties must either produce requested documents or information within 60 days of the time the request was received, or file a written objection in the manner described above. See Rule 12507 of the Customer Code for more information on additional discovery.

Exchange of Documents in Industry Dispute Cases

Rule 13505 of the Industry Code requires that parties to FINRA arbitrations cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration.

Parties may request documents or information from any party by serving a written request directly on the party. Requests for information are generally limited to identification of individuals, entities, and time periods related to the dispute; such requests should be reasonable in number and not require narrative answers or fact finding. Standard interrogatories are generally not permitted in arbitration. See Rule 13506 of the Industry Code for more information on requesting documents and information.

Rule 13507 provides that - unless the parties agree otherwise - within 60 days from the date a discovery request is received, the party receiving the request must either:

 

• Produce the requested documents or information to all other parties;
• Identify and explain the reason that specific requested documents or information cannot be produced within the required time, and state when the documents will be produced; or
• Object as provided in Rule 13508.

 

Objections should set forth the reasons the party objects to producing the documents. An objection to the production of a document or a category of documents is not an acceptable reason to delay the production of any document not covered by the objection. The arbitrators will decide whether disputed documents must be exchanged, and resolve any other issues, including requests for confidential treatment of documents. See Rule 13508 of the Industry Code for more information on objections.

Rule 13507(b) of the Industry Code establishes a good faith standard for the exchange of documents and information; requiring that a party must use its best efforts to produce all documents required or agreed to be produced.

Sanctions for Noncompliance

As noted above, failure to comply with the forum's discovery rules and procedures, or orders of the arbitrators, can, and does, result in sanctions. The following is a partial list of cases in which arbitrators issued sanctions for discovery abuse:

 

• A member was ordered to pay $10,000 a day for each day that the firm continued to withhold documents that the panel ordered the firm to produce;
• A claimant was ordered to reimburse the respondent costs in the amount of $1,500 for failing to respond in a timely manner to ordered discovery requests;
• A member was assessed over $10,000 in sanctions and $2,500 in attorney's fees when a panel found that the member intentionally concealed documents and delayed the discovery process;
• A panel awarded a claimant over $7,000 due to a member firm's failure to cooperate in the discovery process;
• A claimant was ordered to pay to a respondent $1,475 as a sanction for failing to comply with discovery procedures;
• A panel awarded a claimant $2,750 in attorney's fees as a sanction for the member's failure to provide discoverable material.
• A panel awarded a claimant $3,000 in sanctions for a respondent's failure to provide discoverable material as ordered by the panel;
• Claimants were ordered to pay a respondent $1,000 as a sanction for failing to provide copies of expert witness exhibits; and
• A panel sanctioned a member $10,000 for failure to produce documents required by the chairperson of the panel.

 

In addition, arbitrators have dismissed claims with prejudice when claimants failed to comply with discovery orders after previous sanctions proved ineffective. Arbitrators in several other cases referred members or associated persons for disciplinary review for discovery abuse.

To avoid discovery sanctions, parties should familiarize themselves with the forum's discovery rules and procedures, and make every attempt to cooperate in the exchange of documents and information within the designated time frames. In customer cases, parties should assume that documents on Document Production Lists 1 and 2, and any other applicable lists, are discoverable, and, absent a written objection, should exchange such documents without waiting for an arbitrator order to do so.

Other Arbitrator and Staff Actions to Deal with Discovery Abuse

In addition to reminding parties of their obligation to comply with the forum's discovery rules and procedures, FINRA reminds arbitrators about what they can do to manage the discovery process effectively, including what sanctions are available when parties violate either the forum's rules or arbitrator orders. Among other things, FINRA offers an online discovery "mini-course" to all arbitrators. FINRA Dispute Resolution staff has also initiated a practice of bringing all alleged discovery abuses to the attention of the Director of Arbitration and the President of FINRA Dispute Resolution. These cases will be carefully reviewed and, when appropriate, FINRA Dispute Resolution will refer such cases to FINRA Enforcement for disciplinary review.

Discovery Arbitrator Pilot Program

FINRA has initiated a voluntary Discovery Arbitrator Pilot Program in which a single Discovery Arbitrator is appointed to resolve all discovery disputes prior to the hearing. These Discovery Arbitrators are not a part of the panel assigned to hear the merits of the case; they are appointed solely to resolve the parties' discovery disputes. Parties may contact their FINRA Case Administrator for more information on the voluntary Discovery Arbitrator Pilot Program.

Conclusion

FINRA hopes that these measures will lead to a significant reduction in the instances of discovery abuse in the forum, and alleviate the need for future rule changes or other additional steps to deter such abuse.