[Federal Register Volume 64, Number 175 (Friday, September 10, 1999)]
[Notices]
[Pages 49256-49261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23610]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41833; File No. SR-NASD-99-07]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the National Association of Securities Dealers,
Inc. Creating a Discovery Guide for Use in NASD Arbitrations
September 2, 1999.
I. Introduction
On January 29, 1999, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), through its wholly owned
subsidiary NASD Regulation, Inc. (``NASD Regulation''), filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ Under
its
[[Page 49257]]
proposal, NASD Regulation seeks to create a discovery guide for use in
NASD arbitrations. Notice of the proposal, as amended by Amendment No.
1 and Amendment No. 2, was published in the Federal Register on April
23, 1999 (``Notice'').\3\ The Commission received eight comment letters
on the filing.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 41302 (April 16,
1999), 64 FR 20036 (File No. SR-NASD-99-07).
\4\ See letters from Cliff Palefsky, National Employment Lawyers
Association (``NELA''), to Secretary, Commission, dated May 4, 1999
(``NELA Letter''); Barbara Black, Professor of Law, to Secretary,
Commission, dated May 13, 1999 (``Black Letter''); Mark E. Maddox,
Public Investors Arbitration Bar Association (``PIABA''), to
Jonathan G. Katz, Secretary, Commission, dated May 18, 1999 (``PIABA
Letter''); Linda P. Drucker, Charles Schwab & Co. Inc. (``Schwab''),
to Jonathan G. Katz, Secretary, Commission, dated May 14, 1999
(``Schwab Letter''); Stephen G. Sneeringer, Securities Industry
Association (``SIA''), to Jonathan G. Katz, Secretary, Commission,
dated May 14, 1999 (``SIA Letter''); Paul L. Matecki, Raymond James
& Associates, Inc. (``Raymond James''), to Jonathan G. Katz,
Secretary, Commission, dated May 14, 1999 (``Raymond James
Letter''); Norman S. Poser, Professor of Law, to Secretary,
Commission, dated May 13, 1999 (``Poser Letter''); Dan Jamieson, to
Jonathan G. Katz, Secretary, Commission, dated June 1, 1999
(``Jamieson Letter'').
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II. Description of the Proposal
NASD Regulation proposes to create a Discovery Guide to streamline
the discovery process in NASD arbitrations involving customers. The
Discovery Guide, which contains Document Production Lists, provides
parties to an arbitration proceeding guidance on which documents they
should exchange without arbitrator or NASD Regulation staff
intervention. Further, the Discovery Guide provides arbitrators with
guidance in determining which documents should be produced by customers
and member firms or associated persons in customer arbitrations.
The Discovery Guide, which includes the Document Production Lists,
is intended to function as a guide for parties and arbitrators in the
discovery process. It is not intended to bind arbitrators or parties in
a particular case. Further, nothing in the Discovery Guide precludes
parties from voluntarily agreeing to an exchange of documents in a
manner or scope different from that set forth in the Discovery Guide or
Document Production Lists. In addition, any party can make a motion
objecting to the production of particular documents included on the
applicable Document Production List(s) in any arbitration proceeding.
Likewise, any party can request that additional documents, not included
on any of the Document Production Lists, be produced. However, if an
arbitrator directs compliance with the Discovery Guide in connection
with ordering the production of documents, the order, like any other
document production order, is binding on the parties.
Background
The Discovery Guide is a consensus document that was developed over
a two-year period. In January 1996, the Arbitration Policy Task Force
(``Task Force'') chaired by former Commission Chairman David Ruder
recommended that ``[a]utomatic production of essential documents should
be required for all parties, and arbitrators should play a much greater
role in directing discovery and resolving discovery disputes.'' \5\
Based on Task Force recommendations, the NASD's National Arbitration
and Mediation Committee, together with advisors from various diverse
backgrounds, helped to draft the Discovery Guide in an effort to
implement these recommendations. Among those contributing to the
Discovery Guide were persons who are members of the Securities
Industries Conference on Arbitration (``SICA'') \6\, members of SIA,
directors of PIABA, industry representatives, representatives from
major broker-dealers, counsel for claimants, and counsel for the
industry. The Discovery Guide reflects a compromise between the various
interests of the drafters.
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\5\ See Securities Arbitration Reform: Report of the Arbitration
Policy Task Force to the Board of Governors of NASD (``Task Force
Report'') at 2.
\6\ SICA was formed to develop and maintain a Uniform Code of
Arbitration and to provide a forum for the discussion of new
developments in securities arbitration among arbitration self-
regulatory organization (``SRO'') forums and participants in those
forums. The membership includes representatives from the SROs with
securities arbitration forums, three or four ``public'' members, and
a representative from the SIA.
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Discovery Guide Features
NASD Regulation proposes that the Discovery Guide be used as a
supplement or an addendum to the guidance regarding discovery set forth
in The Arbitrator's Manual, published by SICA, and particularly the
provisions in the section entitled, ``Prehearing Conference,'' at pages
11-16. SICA members compiled The Arbitrator's Manual as a guide for
arbitrators, and it is designed to supplement and explain the Uniform
Code of Arbitration as developed by SICA. The procedures and policies
set out in both The Arbitrator's Manual and the Discovery Guide are
discretionary and may be changed by the arbitrator(s) so long as they
are consistent with the rules of the forum. Further, nothing in the
Discovery Guide, including the Document Production Lists, precludes the
parties from voluntarily agreeing to an exchange of documents in a
manner different from that set forth in the Discovery Guide.
The Discovery Guide consists of introductory and instructional
text, and fourteen Document Production Lists. The first two lists, one
for firms or associated persons and one for customers, contain
documents that are presumptively discoverable in all customer cases,
unless the arbitrator(s), in the exercise of discretion, determines
that some or all of the documents in the two lists should not be
produced. The next twelve lists, which are dispute specific, contain
additional documents that should be produced by both customers and
firms or associated persons for respectively, claims of churning,
failure to supervise, misrepresentation/omissions, negligence/breach of
fiduciary duty, unauthorized trading, and unsuitability. For example, a
party involved in a churning claim should produce documents from either
List One or Two, which apply to all customer cases, and documents from
List Three or Four, which apply to churning claims.
NASD Regulation's Office of Dispute Resolution (``ODR'') will
provide the parties with the Discovery Guide at the time ODR serves the
statement of claim. If a particular Document Production List is
applicable, the parties should consider those documents to be
presumptively discoverage. Unless the party files a timely objection,
those documents should be produced not later than 30 calendar days from
the date the answer is due or filed, whichever is earlier. Objections
to production of any document on a Document Production List, and any
responses thereto, are to be considered by the arbitrator(s). The
arbitrator(s) then determine whether the objecting party has overcome
the presumption of discoverability based upon sufficient reason(s).
In addition to specific document production requirements, the
Discovery Guide provides general guidance on other issues such as
confidential treatment of documents, additional discovery requests,
depositions, admissibility of evidence, arbitrator participation, and
sanctions. This guidance is discussed below.
Confidential Treatment. The Discovery Guide provides that parties
may stipulate to the confidential treatment of documents.
Alternatively, the arbitrator(s) may issue confidentiality orders.
However, the Discovery Guide further advises that arbitrator(s) should
not issue orders or use confidentiality agreements to require parties
to produce documents
[[Page 49258]]
otherwise protected by established privileges. As discussed more fully
below, a party objecting to discovery on grounds of privilege has the
burden to demonstrate that a particular document is privileged.
Additional Discovery Requests. The Discovery Guide states that
parties may request documents in addition to those identified in the
Document Production Lists, and it provides guidance regarding the
timing of such requests. Unless a longer period is allowed by the
requesting party, requests should be satisfied or objected to within 30
days from the date of service of the document request. Any response to
objections to a request should be served on all parties within 10 days
or service of the objection.
The Discovery Guide also provides a mechanism for a party to seek
to compel production of documents when the adverse party refuses to
produce such documents or offers only to produce alternative documents
that are unacceptable to the requesting party. The Discovery Guide
instructs that the arbitrator(s) carefully consider such motions,
regardless of whether the item requested is on any of the Document
Production Lists.
Depositions. The Discovery Guide discusses the arbitrator(s)'
authority to permit depositions. It suggests depositions be limited to
circumstances such as: (a) To preserve the testimony of ill or dying
witnesses; (b) to accommodate essential witnesses who are unable or
unwilling to travel long distances for a hearing and may not otherwise
be required to participate in the hearing; (c) to expedite large or
complex cases; and (d) to address unusual situations where the
arbitrator(s) determines that circumstances warrant departure from the
general guidance.
Admissibility. Production of documents listed in the Discovery
Guide does not create a presumption that the documents are admissible
at the arbitration hearing. Nothing in the Discovery Guide prevents a
party from objecting to the introduction of any document as evidence at
the hearing to the same extent that any other objection may be raised
in arbitration.
Arbitrator Participation. Under the Discovery Guide, the NASD
arbitrator(s) will participate in the initial and subsequent prehearing
conferences to organize the management of the case, set a discovery
cut-off date, identify dispositive or other potential motions, schedule
hearing dates, determine whether mediation is desirable, and resolve
any other preliminary issues. If, at the time of the initial prehearing
conference, the exchange of properly requested discovery has not
occurred, the Discovery Guide provides that the arbitrator(s) should
order the production of all required documents subject to production
Sanctions. The Discovery Guide instructs arbitration panels to
issue sanctions if any party fails to produce documents or information
required by a written order, unless the panel \7\ finds that there is
``substantial justification'' for the failure to produce the documents
or information. The Discovery Guide recognizes that panels have wide
discretion to address non-compliance with discovery orders. For
example, the panel may make an adverse inference against a party or
assess adjournment fees, forum fees, costs and expenses, and/or
attorneys' fees caused by noncompliance. In extraordinary cases, the
Discovery Guide suggests the panel may initiate a disciplinary referral
against a registered entity or person who is a party or witness in the
proceeding or may, pursuant to Rule 10305(b), dismiss a claim, defense,
or proceeding with prejudice as a sanction for intentional failure to
comply with an order of the arbitrator(s) if lesser sanctions have
proven ineffective.
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\7\An arbitration panel's ruling need only be by majority vote;
it need not be unanimous.
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III. Summary of Comments
The Commission received eight comment letters on the proposal.\8\
One commenter urged the adoption of the Discovery Guide as proposed.\9\
Further, none of the commenters opposed the concept of creating a
Discovery Guide for use in customer arbitration.\10\ However, most of
the commenters had particular criticisms about certain aspects of the
Discovery Guide. Additionally, seven of the eight commenters made
suggestions on how to improve the Discovery Guide.\11\ With respect to
several specific criticisms, the comments were evenly distributed on
both sides of the issue.
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\8\ See supra note 4.
\9\ See PIABA Letter.
\10\ Out of the eight commenters, seven stated that they were in
favor of the concept of a Discovery Guide. See PIABA Letter, Black
Letter, Schwab Letter, SIA Letter, Raymond James Letter, Poser
Letter, and Jamieson Letter. The eighth, from NELA, stated that
while the desire to facilitate discovery is appropriate, NELA
believed that the proposed Discovery Guide is problematic in certain
material aspects. See NELA Letter.
\11\See NELA Letter, Black Letter, Schwab Letter, SIA Letter,
Raymond James Letter, Poser Letter, and Jamieson Letter.
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Discovery Guide as a Proposed Rule Change
Three commenters assert that the Discovery Guide should not be
filed with the Commission as a proposed rule change.\12\ They content
that arbitration relies on the flexibility of arbitrators, and adopting
the Discovery Guide as a rule would limit arbitrator(s)' discretion. In
addition, they argue that because the Discovery Guide will be part of
The Arbitrator's Manual, which is not a rule, and will only be a
``guide,'' it should not be submitted as a rule under the rule filing
process. Finally, the commenters maintain that adopting the Discovery
Guide as a rule will give it more importance than what was intended by
its drafters. In contrast, another commenter contends that, because the
Discovery Guide contains guidelines and not mandates, whether it is
issued as a rule is immaterial.\13\ Further, that commenter commends
the Commission for allowing the public to comment on the guidelines
through the formal rulemaking process.
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\12\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\13\See Jamieson Letter.
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Customer Personal Financial Information
Three commenters contend that producing certain documents
reflecting personal financial information infringes on customers'
privacy rights.\14\ In particular, these commenters argue that the
production of tax returns and other financial information, such as
business ownership records, should be limited to certain types of
claims, not be required at all, or the firm should have the burden of
establishing the relevance of these documents in specific cases. One of
these commenters asserts that a customer's right to privacy can only be
waived by the customer, and not by the committees who created the
Discovery Guide or by the securities industry as a condition of the
industry complying with its legal obligation to provide relevant
information in an arbitration.\15\ The commenter argues that decisions
affecting important rights of individual customers (i.e., forced
disclosure of personal and private information) should be made on a
case-by-case basis, and the information should not be subject to
routine disclosure. In addition, another commenter states that the
production of statements concerning a customer's net worth is unfair
because most customers would have to create these statements.\16\
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\14\ See NELA Letter, Black Letter, and Poser Letter.
\15\ See NELA Letter.
\16\ See Jamieson Letter.
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On the other hand, three industry commenters argue that customer
tax returns and other financial information are crucial in all types of
customer/
[[Page 49259]]
broker disputes.\17\ According to one of these commenters, tax returns
and information about net worth are often the only pertinent
documentation that a customer has.\18\ Further, they assert that a
customer's entire tax return (not only the portions listed in the
Discovery Guide) and the customer items in List 8, such as a resume,
should be produced in every case. These commenters believe that this
information is relevant in every dispute.
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\17\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\18\ See Schwab Letter.
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Production Burden on Firms
The three industry commenters argue that the use of documents
dealing with an associated person's disciplinary history violates a
basic premise of the Federal Rules of Evidence.\19\ They maintain that
evidence of prior bad acts, such as records of disciplinary history or
information reported on Forms U-4 and U-5, should not be used in
arbitration to demonstrate an alleged bad act. In response to these
comments, another commenter states that production of these records is
not prejudicial since an associated person's disciplinary history is
already publicly available through the NASD's Public Disclosure
Program.\20\
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\19\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\20\ See Jamieson Letter.
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Additionally, one industry commenter argues that the production of
disciplinary history documents would be particularly burdensome for
discount and on-line brokers.\21\ The commenter contends that because a
customer of a discount broker deals with many associated persons, a
firm's production burden would be tremendous for many types of
disputes. In response to this problem, the commenter suggests limiting
the production of documents to those concerning an associated person
who is regularly and permanently assigned to the account, if any. On
the other hand, another commenter notes that the materials to be
produced by firms under the Discovery Guide are kept in the normal
course of a firm's business pursuant to industry recordkeeping
requirements.\22\
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\21\ See Schwab Letter.
\22\ See Jamieson Letter.
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The three industry commenters also argue that firms should not have
to produce internal audit reports in failure to supervise claims.\23\
They maintain that since failure to supervise can be alleged in almost
all claims, internal audit reports will have to be produced in every
case. Moreover, these commenters assert that production might affect
the vitality and candor of internal audit reports, and thus harm the
``self-policing'' obligation of firms.\24\ Another commenter, however,
argues that any increased exposure of internal audit reports will help
ensure that the reports' recommendations are followed internally, and
that self-policing will thereby by improved.\25\ Furthermore, one
commenter agrees with the Discovery Guide that internal audit reports
are likely to be relevant in a failure to supervise case, regardless of
whether they focus on a particular associated person.\26\
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\23\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\24\ Notwithstanding these comments, the Commission reminds all
regulated entities and persons that nothing in the Discovery Guide
or Document Production Lists changes or reduces their obligations to
monitor compliance with the federal securities laws or rules of
self-regulatory organizations.
\25\ See Jamieson Letter.
\26\ See Poser Letter.
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Miscellaneous
Most of the commenters make suggestions on how to improve the
Discovery Guide and, in particular, the Document Production Lists. For
example, one commenter suggests that the first two lists, which apply
to all customer cases, be ``pruned'' to avoid placing an unreasonable
burden on the parties.\27\ In addition, another commenter suggests that
confidentiality orders or stipulations be used sparingly because
investors already have little information about the arbitration
process.\28\ Another commenter expressed concern that the Discovery
Guide's recognition of ``privacy'' and ``confidentiality'' as valid
objections to document production may encourage parties to make
objections to delay the discovery process.\29\
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\27\ See Poser Letter.
\28\ See Jamieson Letter.
\29\ See Black Letter.
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Several commenters addressed privilege issues. Four commenters
contend that the Discovery Guide should not contain a list of
privileges because privileges are traditionally governed by state
law.\30\ Similarly, three of these commenters state that because most
privileges would only be available to customers, a list of applicable
privileges should not be included in the Discovery Guide.\31\ In
addition, one commenter recommends that the Discovery Guide contain a
requirement that parties produce a privilege log to identify documents
not produced as a result of the assertion of a privilege.\32\ The
commenter believes this will help protect parties from the improper
assertion of a privilege.
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\30\ See Schwab Letter, SIA Letter, Raymond James Letter, and
Jamieson Letter.
\31\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\32\ See NELA Letter.
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In addition, one commenter argues that arbitrators should be given
more power to sanction parties for non-production of documents.\33\ The
commenter states that with the current proposal, an arbitrator first
needs an order for production before the arbitrator can issue
sanctions. The commenter believes that the Discovery Guide should be
amended so that if a party fails to produce a listed document, the
party should be sanctioned unless the party can provide a substantial
justification for not producing the document. Similarly, another
commenter contends that the documents on the lists should not be
presumptively discoverable, but automatically produced.\34\ The
commenter believes this will help streamline the arbitration process.
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\33\ See Poser Letter.
\34\ See Black Letter.
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IV. Discussion
One commenter states that the Commission should give deference to
this proposal because it was reached through compromise by
organizations who represent opposing interests.\35\ The Discovery Guide
reflects a compromise between the various interests of the drafters.
The Discovery Guide was drafted over a two-year period with the input
of organizations who represent different interests within the
securities industry. Among those contributing to the Discovery Guide
were persons who are members of SICA, members of SIA, directors of
PIABA, industry representatives, representatives from major broker-
dealers, counsel for claimants, and counsel for the industry.
Similarly, the comment letters received by the Commission reflect the
views of a cross section of the securities industry, plaintiff
representatives, academicians, and others involved in the arbitration
process. The Discovery Guide, when considered as a whole, provides
useful guidance to arbitrators, claimants, and industry participants in
customer arbitrations and fairly balances their respective interests.
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\35\ See PIABA Letter.
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As noted above, several commenters assert that the Discovery Guide
should not be filed with the Commission as a proposed rule change
because arbitration relies on the flexibility of arbitrators, and
adopting the Discovery Guide as a rule would limit arbitrators'
[[Page 49260]]
discretion.\36\ In addition, one commenter notes the Discovery Guide
states that an arbitration panel should issue sanctions if a party
fails to produce documents or information required by a written order,
not for non-compliance with the Discovery Guide itself.\37\ That
commenter, therefore, argues that arbitrators should be given more
power to sanction parties for non-compliance with the Discovery Guide.
Further, another commenter asserts that instead of being presumptively
discoverable as they are under the Discovery Guide, the Documents on
the document Production Lists should be automatically produced.\38\
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\36\ See Schwab Letter, SIA Letter, and Raymond James Letter.
\37\ See Poser Letter.
\38\ See Black Letter.
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By its terms, the Discovery Guide provides for arbitrator(s) to
exercise discretion in tailoring the Discovery Guide to particular
cases.\39\ Arbitrator(s) can change any Provision of the Discovery
Guide. Further, nothing in the Discovery Guide shifts the burden of
proof a party bears in arbitration, and the mere fact that a document
is contained in a Document Production List does not make the document
automatically admissible in any arbitration proceeding.
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\39\ Under Rule 19b-4, a stated policy, practice, or
interpretation of the self-regulatory organization shall be deemed
to be a proposed rule change unless (1) it is reasonably and fairly
implied by an existing rule of the self-regulatory organization or
(2) it is concerned solely with the administration of the self-
regulatory organization and is not a stated policy, practice, or
interpretation with respect to meaning, administration, or
enforcement of an existing rule of the self-regulatory organization.
17 CFR 240.19b-4(c). Proposed rule changes submitted under Section
19 of the Act and Rule 19b-4 are subject to a notice and comment
period. The Discovery Guide falls within Rule 19b-4.
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As stated in the Discovery Guide and the Purpose section of NASD
Regulation's filing with the Commission, the Discovery Guide (including
the Document Production Lists) is intended to function as a guide for
arbitrators and parties in the discovery process and is not intended to
bind arbitrators or parties in a particular case. While parties should
consider the documents on the lists to be presumptively discoverable,
the Discovery Guide specifically notes that all of the documents on
each list are not required to be produced in every case. Nothing in the
Discovery Guide prevents parties from voluntarily agreeing to an
exchange of documents in a manner or scope different from that set
forth in the Discovery Guide.
Furthermore, parties may also object to the production of any
particular document, or seek the production of additional documents not
on any of the Document Production Lists. The arbitrator(s) then makes a
determination whether production is required. To the extent that an
arbitrator uses the Discovery Guide in connection with ordering the
production of documents, the order is binding on the parties. The
failure to comply with the Discovery Guide itself does not
automatically result in sanctions; rather, sanctions are imposed only
after a party has failed to comply with an arbitrator's order. Thus,
arbitrators retain their discretion under the Discovery Guide to manage
arbitrations as they deem appropriate.
Some commenters objected to the burden on customers to produce
certain documents in all customer arbitrations. For example, three
commenters contend that producing certain documents infringes on
customers' privacy rights.\40\ Conversely, other commenters object to
firms' production burdens under the Discovery Guide.\41\ The Discovery
Guide reflects a fair compromise between the interests of the drafters
and will benefit arbitrators in handling document production. Further,
we note that the Document Production Lists were drafted to provide
parties with information that is reasonably calculated to lead to the
discovery of admissible evidence in arbitrations.\42\ Arbitrator(s)
should use their discretion to consider whether in a particular case,
the documents on the Document Production Lists will lead to the
discovery of admissible evidence. Nothing in the Discovery Guide
affects a party's ability to object to the production of any particular
document or class of documents, or to request additional documents.
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\40\See NELA Letter, Black Letter, and Poser Letter.
\41\See Schwab Letter, SIA Letter, and Raymond James Letter.
\42\See e.g., Fed. R. Civ. P. 26(b)(1).
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Three commenters also assert that firms should not have to produce
documents about an associated person's disciplinary history because
production would be burdensome and the documents would be
inadmissible.\43\ As one commenter noted, some disciplinary information
about firms and associated persons is already available to the public
through the NASD's Public Disclosure Program. Furthermore, as stated in
the Discovery Guide, the production of documents in discovery under the
Discovery Guide does not create a presumption that the documents are
admissible in the arbitration proceeding.
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\43\See Schwab Letter, SIA Letter, and Raymond James Letter.
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In addition, three commenters argue that firms should not have to
produce internal audit reports in failure to supervise claims because
production might affect the vitality and candor of these reports.
Another commenter, however, takes the opposite view--the commenter
believes the production of these reports will result in better self-
policing. The Discovery Guide is narrowly focused in that it only calls
for the production of internal audit reports, if they exist, in failure
to supervise claims. In addition, internal audit reports may help a
firm defend a failure to supervise claim. Nothing in the Discovery
Guide or the Document Production Lists changes firms' obligations to
monitor compliance with the federal securities laws or rules of self-
regulatory organizations. To the extent a firm objects to the
production of such internal audit reports in any particular claim,
nothing in the Discovery Guide precludes a firm from filing an
objection with the arbitrator(s). In addition, whether such a report is
admissible is a decision for the arbitrator(s).
Many of the commenters made specific suggestions on how to improve
the Discovery Guide and, in particular, the Document Production Lists.
For example, one commenter suggests that confidentiality orders or
stipulations be used sparingly because investors already have little
information on the arbitration process.\44\ The Discovery Guide does
not change current features of the arbitration process. Stipulations
are, by definition, made by agreement of the parties and
confidentiality orders can only be issued by arbitrator(s) after they
fully consider the issue. While a confidentiality order may prevent the
public dissemination of particular documents or information, it should
not affect the arbitration process. The same commenter also asserts
that the production of statements concerning a customer's net worth is
unfair because most customers would have to create these statements.
Nothing in the Discovery Guide requires customers to create documents
that do not otherwise exist. Indeed, the Discovery Guide provides that,
if a party has no responsive documents to any document request, the
party should provide an affirmation to that effect.
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\44\See Jamieson Letter.
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In addition, many of the commenters made specific suggestions to
modify one or more aspects of the Document Production Lists. Many of
these suggestions may have considerable merit in particular cases. For
example, one commenter suggests that the first
[[Page 49261]]
two Document Production Lists be ``pruned'' to avoid placing an
unreasonable burden on the parties. In this regard, if production of a
particular document or class of documents called for under an
applicable Document Production List is unduly burdensome to a party,
that party may object to production on that or any other grounds. The
arbitrator(s) retains the ability to modify any request in order to
protect against discovery abuses. Furthermore, there is nothing in the
Discovery Guide that prevents a party from asking for additional
documents such as those suggested by some commenters. We recognize the
commenters' intentions to improve the Discovery Guide and the discovery
process in general. However, the Discovery Guide reflects a compromise,
which was obtained after a long period of negotiation, between various
interests of the drafters. For each item that one commenter thought
would be burdensome for a customer, another commenter believed a
different item would be burdensome to a firm. As adopted, the Discovery
Guide will benefit arbitrators and parties in handling document
production.
One commenter suggests that parties produce a privilege log to
identify documents not produced as a result of the assertion of a
privilege. NASD Rule IM-10100 states that ``[i]t may be deemed conduct
inconsistent with just and equitable principles of trade and a
violation of Rule 2110 for a member of a person associated with a
member to * * * fail to appear or to produce any document in his
possession or control as directed pursuant to provisions of the NASD
Code of Arbitration Procedure * * *'' All parties should act in good
faith and carefully consider the relevant case law when asserting a
privilege, and arbitrators should consider whether a privilege log is
necessary to help facilitate the discovery process.\45\ It is expected
that the NASD Regulation will take appropriate action against members
and registered persons who do not act in good faith or otherwise
violate IM-10100.
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\45\ The Commission agrees with several commenters that
applicable privileges, which are usually a matter of state law,
should not be specified in the Discovery Guide.
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The Discovery Guide will streamline the discovery process. By
creating lists of documents that should be produced in all customer
arbitrations as well as particular types of cases, the Discovery Guide
will help expedite the discovery process and reduce the number of
discovery disputes between parties, which in turn should help lower the
cost of the arbitration discovery process. Further, nothing in the
Discovery Guide changes the burden of establishing or defending any
aspect of a claim. When considered as a whole, the Discovery Guide
provides useful guidance to parties and arbitrators in NASD-sponsored
customer arbitrations.
In addition, the Commission finds that the proposal is consistent
with the requirements of Section 15A of the Act \46\ and the rules and
regulations thereunder that govern the NASD.\47\ In particular, the
Commission finds that the proposal is consistent with Section 15A(b)(6)
of the Act \48\ which requires, among other things, that the rules of
an association be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, and,
in general, to protect investors and the public interest; and are not
designed to permit unfair discrimination among customers, issuers,
brokers, or dealers.
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\46\ 15 U.S.C. 78o-3.
\47\ In addition, pursuant to Section 3(f) of the Act, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\48\ 15 U.S.C. 78o-3(b)(6).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule change (SR-NASD-99-07), as amended, is
hereby approved.
\49\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23610 Filed 9-9-99; 8:45 am]
BILLING CODE 8010-01-M
