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FINRA Code of Arbitration and Discovery Guidelines

FINRA encourages and emphasizes cooperation from both parties at all times regarding discovery requests.

In FINRA arbitrations, cases many attorneys see discovery requests objected to by opposing counsel. Typically, opposing counsel objects to discovery requests citing that items requested are either “overly broad, vague, or ambiguous”, or “impermissible per FINRA’s Code of Arbitration Procedure”. However, despite opposing counsel’s reasoning, many objections to discovery requests are irrelevant and do not hold up in regard to FINRA’s Code of Arbitration Procedure. Attorneys should not be intimidated or discouraged by these objections, but rather should understand that FINRA’s guidelines concerning arbitration allow for most applicable and reasonably obtainable discovery information to be delivered.

FINRA Section 13000: Code of Arbitration Procedure for Industry Disputes

FINRA’s Code of Arbitration Procedure sets forth industry standards for protocol concerning the investigation of securities-related mishandling proceedings. The sections of this rule that directly concern discovery guidelines are FINRA Rules 13505, 13506, and 13507.

13505: Cooperation of Parties in Discovery

“The parties must cooperate to the fullest extent practicable in the exchange of documents and information to expedite the arbitration.”

Rule 13505 describes the core of FINRA’s policy in regard to arbitration and discovery requests. The main point of this rule is FINRA’s emphasis on cooperation, and is a stance that FINRA strongly maintains throughout the entire arbitration process.

13506: Discovery Requests

(a) Requests for Documents or Information
• 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.

(b) Making Discovery Requests
Discovery requests may be served:
• On the claimant, or any respondent named in the initial statement of claim, 45 days or more after the Director serves the statement of claim; and
• On any party subsequently added to the arbitration, 45 days or more after the statement of claim is served on that party.

At the same time, the party must serve copies of the request on all other parties. Any request for documents or information should be specific and relate to the matter in controversy.”

From Rule 13506, not only are timelines for discovery requests revealed, but more importantly, FINRA’s policies concerning the material that may be requested in discovery. Essentially, FINRA limits requested materials to be simply relevant to the case and in a non-narrative format; there are no other limitations to material that may be requested for discovery.

13507: Responding to Discovery Requests

(a) 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.

(b) A party must act in good faith when complying with paragraph (a) of this rule. "Good faith" means that a party must use its best efforts to produce all documents required or agreed to be produced. If a document cannot be produced in the required time, a party must establish a reasonable timeframe to produce the document.

(c) If a party redacts any portion of a document prior to production, the redacted pages (or range of pages) shall be labeled "redacted.

Most importantly from Rule 13507, FINRA requires the responding party to act in “good faith” when responding to discovery requests. Good faith is the key term from this rule, as respondents are required to make a reasonable attempt to locate requested documents, and expend reasonable effort in doing so.

Process for Receiving Objected Discovery

Per FINRA Rules 13505, 13506, and 13507, impermissible discovery requests are limited to requests that have been made prior to the 45-day discovery request waiting period, those that are irrelevant to the case, and those that would require an extreme obligation of the responding party. From these rules, most discovery requests that are made after the proper waiting which are pertinent to the case are allowed under FINRA.

In cases where claimants or respondents have objected to discovery requests that are permissible per FINRA Rule 13000, a "motion to compel", discovery may be issued by the arbitration panel. In a motion to compel discovery, a panel of FINRA arbitrators review and overrule objections to discovery for what they deem to be relevant and permissible. From here, the claimants or respondents are required to furnish discovery requests with the threat of sanctions if material is not received within seven days from the issuance of the motion to compel.

By Bob Lawson, AIF®, CFE®, RFC®, LUTCF®
FINRA & Securities Expert Witness - FINRA Mediator & Arbitrator - Mediation Consultant
Bob Lawson is the President and Chief Compliance Officer of Barrington Capital Management, Inc. He is a Securities Litigation Consultant/Expert Witness, FINRA & NFA Dispute Resolution Arbitrator, Certified Fraud Examiner, Accredited Investment Fiduciary and Qualified Neutral under Minnesota Rule 114 of Standard of Practices.

Copyright Bob Lawson, AIF®, CFE®, RFC®, LUTCF®

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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