The Discovery Process in FINRA Arbitrations
After an arbitration claim proceeds past the initial pleadings phase, parties must participate in the exchange of documents and information also known as discovery. But what documents do you have to turn over to the other side? What documents and information should you expect to receive from your current or former customer? This article explains how discovery works in FINRA arbitrations and the obligations that are placed on each side.
FINRA discovery rules are outlined in the FINRA Code of Arbitration Procedure for Customer Disputes, specifically, in Rules 12500-12514 of the Code (FINRA refers to this Code as its Customer Code). In addition to the Customer Code, discovery in FINRA arbitrations is supplemented by FINRA’s Discovery Guide and Document Production Lists.
For registered representatives or broker-dealers whom find themselves defending a FINRA arbitration, it’s worth understanding how the discovery process works. Once the parties have passed the initial complaint phase and the initial Pre-Hearing Conference Order has been issued setting all applicable deadlines, including discovery deadlines, the next step is a pre-hearing telephonic conference. Under Rule 12500 of the Customer Code, arbitrators will hold this conference to set schedules for the arbitration. The schedules will include discovery, briefing, and motions deadlines. The arbitrators will also schedule subsequent hearing sessions and address preliminary matters the parties present. They may also schedule other preliminary conferences to resolve discovery or other topical disputes.
After the Initial Pre-Hearing Conference, the parties will engage in the full-fledged discovery process, in which they will exchange documents and information pertinent to the dispute at issue. Under the Customer Code, parties are required to cooperate in the discovery process and act in good faith, meaning each party must use its best efforts to produce all documents and information required or agreed to be produced. If a party fails to cooperate or fulfill its discovery obligations, the arbitration panel can impose discovery sanctions on the party. If non-compliance continues, the panel may dismiss the party’s claim, defense, or the entire proceeding with prejudice for an intentional and material failure to comply with a discovery order of the panel if prior warnings or sanctions have proven ineffective.
The categories of documents that are presumptively discoverable are included in the FINRA Discovery Guide and Document Production Lists, which are designed to supplement and clarify the Customer Code. According to FINRA, the Discovery Guide and Document Production Lists serve as a guide for the arbitrators and parties.
The Guide makes clear that discovery in FINRA arbitrations should be flexible. The rules are meant to be applied by the arbitrators to best suit the needs of the parties and the resolution of the particular dispute. Further, the rules guide parties and arbitrators on the following issues:
- How to handle excessive costs of production;
- In what form documents should be produced: electronic or paper;
- How to resolve disputes regarding the form of production; and
- Confidentiality, privacy, and privilege in document production.
There are two Document Production Lists. List 1 lists documents a firm and associated persons shall produce in all cases. It contains 22 categories of documents, including account information for the customer, all customer agreements, correspondence, reports, and the like. List 2 outlines 19 categories of documents that customers shall produce in all cases. List 2 includes the customer’s income tax returns, financial statements, documents received from the other party, account statements for all other investment accounts, and more.
The documents on the Document Production Lists are presumptively discoverable. However, they are not meant to limit the arbitrator’s ability to be flexible in discovery decisions. For that reason, the Document Production Lists are best understood as a guide, not a rule. Arbitrators can order the parties to produce documents that are not on the lists. They can also decide that documents on the lists should not be produced in a particular arbitration. Further, arbitrators can alter the schedules for document production outlined in the Customer Code if the circumstances necessitate a different schedule.
Additional Discovery Requests
Additional documents and information may be requested as part of the FINRA discovery process under Rule 12507. The requests must be made in writing and served upon the other party or parties. Requests for information are limited to the identification of individuals and entities related to the dispute and clarification of relevant periods. Interrogatories, which are a common discovery tool in litigation before state and federal district courts, are generally not permitted in FINRA arbitration.
The deadlines and schedule for the production of documents are covered in Customer Code Rule 12506. Rule 12506 requires that documents listed in the Document Production Lists must be produced within 60 days of the date a party’s answer is due. Similarly, under Rule 12507, additional documents and information must be produced within 60 days of a party’s receipt of the discovery requests.
Objections and Motions to Compel
If a party cannot (or will not) produce documents that are in the Document Production Lists or any additional documents or information requested, then the party must either:
- Identify and explain the reason that specific documents cannot be timely produced and state when the documents will be produced; or
- Object to the production of such documents in writing as provided in Rule 12508.
Under Rule 12508, a party may object to the production of documents included in the Document Production Lists and to other discovery requests. However, if objections are not made within the timeframe for the production of documents, then the objection is waived. Frivolous objections may warrant discovery sanctions at the discretion of the arbitration panel under Rule 12511.
If a party fails to produce documents and information as required by the Customer Code, the other party may file a motion to compel discovery with the arbitration panel. Rule 12503 outlines this process.
FINRA arbitrators have the authority to issue subpoenas to parties for the production of documents and witness testimony at the hearing. It is anticipated that such subpoenas will not be required as parties should cooperate in discovery for the production of information, documents, and party witnesses. Rule 12512 sets forth the grounds, timing, and manner for objecting to party subpoenas.
Depositions and Non-Party Subpoenas
Both depositions and non-party subpoenas are discouraged in FINRA arbitrations. Nevertheless, a party may make a motion for both types of discovery, and the arbitration panel may grant or deny such a motion at its discretion.
For depositions, Rule 12510 provides that the panel may allow depositions in four limited circumstances:
- To preserve the testimony of ill or dying witnesses;
- To accommodate essential witnesses who are unable or unwilling to travel to the hearing;
- To expedite large or complex cases; and
- If extraordinary circumstances exist.
Non-party subpoenas are discouraged but may be utilized under Rule 12512 if the panel deems them necessary. However, non-party subpoenas are limited to non-party FINRA members as FINRA arbitrators do not have jurisdiction to subpoena a non-FINRA member. Subpoenas of non-FINRA members must be issued through a court of competent jurisdiction, typically the United States District Court in the district where the producing party is located. While these subpoenas can be more difficult to obtain, they can be useful in gathering necessary documents and correspondence.
Discovery in FINRA arbitrations is meant to be more streamlined and straightforward than in traditional civil cases. By following the FINRA Code of Arbitration Procedure for Customer Disputes and the FINRA Discovery Guide, parties can anticipate how discovery will proceed and plan accordingly.