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From Securities Regulation Daily, June 18, 2013

FINRA Proposes Amendments to Discovery Guide and Code of Arbitration Procedure

By Rodney F. Tonkovic, J.D.

On June 13, 2013, FINRA filed with the SEC two proposed rule changes. The first addresses amendments to the Discovery Guide used in customer arbitration proceedings. The second proposal concerns amendments to the Code of Arbitration Procedure for Customer Disputes (Release Nos. 34-69761 and 34-69762, June 13, 2013).

Discovery Guide. The proposed amendments to the Discovery Guide will provide general guidance on electronic discovery issues. Parties will be required to produce electronic files in a "reasonably usable format." The proposed guidance will also ask arbitrators resolving contested motions about the form of document production to consider the totality of the circumstances. Additionally, FINRA is proposing to amend the Discovery Guide’s discussion on cost or burden of production to advise arbitrators that they may order a different form of production if it would lessen the burden of producing electronic documents.

FINRA is also proposing to add guidance on product cases, that is, cases in which "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." The additions to the Guide will describe how product cases differ from other customer cases and will outline the types of documents parties to such cases typically request.

The amendments will also clarify an existing provision on affirmations made when a party does not produce documents specified in the Guide. The amended provision will make it clear that a party may request an affirmation when an opposing party makes only a partial production.

Code of Arbitration Procedure. The other proposal filed on the 13th concerns a proposed rule change amending FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes to simplify arbitration panel selection in cases with three arbitrators. Customers would no longer be required to elect a panel selection method; parties in all customer cases with three arbitrators would get the same selection method. The parties will be provided with a list of 10 chair-qualified public arbitrators, 10 public arbitrators, and 10 non-public arbitrators, and the parties will be permitted to strike four arbitrators on the chair-qualified public list and on the public list. Any party, however, may select an all-public arbitration panel by striking all of the arbitrators on the non-public list.

Social media spot check. In other news, FINRA has posted on its website a new Targeted Examination Letter. The generic letter concerns a "Spot Check of Social Media Communications" and contains a summary of the information that the Advertising Regulation Department would request the recipient to provide. The letter asks the recipient firm to explain its use of social media at the corporate level in the conduct of its business.

The firm must provide the URL of each social media site, the date on which the firm began to use the site, and the identities of those who post on it. The letter also seeks the firm's written supervisory procedures on social media communications and an explanation of how the firm will measure compliance with those policies. Finally, the letter asks for a list of the firm's top 20 producing registered representatives who used social media for business purposes to interact with retail investors and the type of social media used by each individual for business purposes during the relevant period.

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