• FINRA'S Recent Changes To The Discovery Guide
  • December 3, 2013 | Authors: Robert E. Goldberg; Hugo A. Hilgendorff
  • Law Firm: Bressler, Amery & Ross A Professional Corporation - New York Office
  • FINRA recently issued Regulatory Notice to Members (“NTM”) 13-40, which announced several significant amendments to the arbitration Discovery Guide. These changes concern (i) e-discovery, (ii) product cases, and (iii) affirmations regarding non-production. These changes impact all customer cases filed on or after December 2, 2013. The amendments are discussed below.

    1. E-Discovery

    The amended Discovery Guide now encourages parties to discuss the form in which they intend to produce documents (i.e., hard copies or electronic format) and whenever possible, agree to the forms of production. Parties must produce electronic files in a “reasonably useable format,” which is generally the format in which a party ordinarily maintains a document or in a converted format that does not make it more difficult or burdensome for the requesting party to use in connection with the arbitration.

    The amendments also provide guidance for the arbitrators when resolving contested motions concerning the form of production. Arbitrators should consider the totality of circumstances, including whether electronic files are in a “reasonably usable format.” Factors for arbitrators to consider include whether the form of production is different from the form in which the documents are ordinarily maintained, and for documents converted from their original format, a party’s reasons for the change of format, how the documents may be affected by the change of format and whether the requesting party’s ability to review the documents is diminished by a change in the documents’ appearance, searchability, metadata or maneuverability.


    The parties are only encouraged, but are not required, to discuss their intended forms of discovery production. “Form of production” refers to hard copy or electronic production, while “reasonably usable format” refers to the type of electronic file being produced (e.g., PDF or tiff). These changes were undoubtedly added based upon pressure from the claimants’ bar that the formats of electronic production used by respondent investment firms somehow limited their ability to efficiently search through the massive amounts of documents routinely requested by claimants. Although most parties produce documents in regular PDF format, some claimants’ counsel have requested documents in a different format that is more readily searchable in Concordance or Relativity, which are two electronic discovery search tools. Since this section specifically references discovery motions concerning electronic document form and format, we should anticipate an increase in such motion practice, particularly concerning the issue of what constitutes document production in a “reasonably usable format.” While these amendments seek to streamline the review of electronic documents, they actually could result in more burdensome procedures, depending upon the level of litigation relating to electronic discovery and decisions by arbitrators regarding such production. Notably, there is no concomitant relief for investment firms concerning the production of electronic documents.

    2. Product Cases

    FINRA adds a new section to the Discovery Guide concerning product cases. This section expressly allows parties to seek discovery of additional relevant documents in product cases beyond the items in the two Discovery Guide lists. “Product cases” are defined as cases in which at least one of the claims concerns allegations of widespread mismarketing or defective development of a specific security or group of securities. In a product case, Claimants generally seek documents concerning the creation of the product, due diligence review of the product, training concerning or marketing of the product, and post-approval review of the product. FINRA notes seven ways in which product cases differ from other customer cases: (i) a greater volume of documents, (ii) multiple claimants seek the same documents, (iii) documents are not client specific, (iv) the product in dispute is more likely to be the subject of a regulatory investigation, (v) there is a likelihood that a class action concerning the product exists with a mandatory hold for documents, (vi) the same documents have been produced to other parties and regulators, and (vii) documents generally concern due diligence of the product performed by someone who did not handle the customer’s account.

    If the parties do not agree whether a claim centers around a product, the arbitrators, in making that determination, may ask the parties to explain their rationale for whether a claim is or is not a product case.


    In a product case, claimants generally seek documents that go far beyond the client-financial advisor relationship. Although the new Product Cases section of the Discovery Guide does not expressly add additional presumptively discoverable items to Discovery List 1, this new language makes it clear that certain categories of documents, such as documents concerning the creation, due diligence reviews, training and marketing, and post-approval reviews of products, will likely be deemed discoverable in product cases.

    While legitimate product cases do exist, this section likely will encourage the growing trend by the claimants’ bar to transform simple sales practice claims into alleged systemic wrongs of a conspiratorial nature. This development could allow for more expansive and burdensome discovery requests to investment firms, extensive discovery production concerning areas of the firm beyond the branch office, lengthy discovery motion practice, and overall greater expenses in defending arbitration claims.

    To aid in better meeting these challenges, in-house counsel should consider notifying the appropriate groups and departments (e.g., product approval committee, training and marketing departments) of these new discovery provisions and devise a structure for maintaining and retrieving their documents, as these groups may likely be required to produce their documents going forward.

    3. Affirmations

    If a party does not produce a document specified in the Discovery Production Lists, at the request of the party seeking the documents, the producing party must affirm in writing that the party has conducted a good faith search, identify the sources searched, and state that based upon that good faith search, the party does not have the requested document. Arbitrators can also require such affirmations for discovery requests beyond the Discovery Guide Lists.


    Previously, the Discovery Guide required an affirmation upon a requesting party’s request only when no responsive documents were produced. Now, an affirmation can also be requested when there is a partial document production. This requirement will likely lead to an increase in requested affirmations to ensure that “all documents” responsive to a request have been produced. This requirement conflicts with a general objection that in an organization the size of an investment firm (i.e., tens of thousands of employees), it is impossible for anyone to definitively state that “all documents” that were responsive to a particular request were retrieved and produced. Affirmations of non-production may also be difficult to provide concerning certain vague items in Discovery Guide List 1, such as documents evidencing recommended investment strategies (item 3), materials prepared, used or provided to the customer relating to the transactions or products in issue (item 5) and all analyses and account reconciliations (item 12).

    To aid in the drafting of an affirmation of partial or non-production, in-house paralegals or those responsible for retrieving documents should keep a log for each case of “the sources searched” (i.e., the specific departments and employees contacted for documents) so that an affirmation, if needed, can be easily drafted and supported by contemporaneous notes prepared during the search. Also, a standardized list of documents generally responsive to each list item should be developed and used as a checklist so the affiant can be comfortable that they conducted a thorough search.


    The discovery process in FINRA arbitrations has become more complex and places greater burdens on Respondent investment firms. To help control discovery related expenses, in-house counsel should consider implementing standardized approaches for dealing with discovery issues concerning the production of electronic documents, product cases and affirmations of partial and non-production.