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SEC Approves Controversial FINRA Revisions to Securities Arbitration Discovery Guide

David P. Meyer, Esq.

Last week, the SEC finally approved FINRA's proposed changes to the arbitration discovery guide ("CORRECT: SEC Approves Finra Securities-Arbitration Discovery Proposal," Dow Jones Newswire, April 4, 2011). FINRA originally submitted a proposal to change the guide in 2008, but the organization withdrew the proposal when it was attacked from all sides by investors, investor advocates, financial firms, and financial industry advocates. A newly revised proposal was filed in July of 2010.

The FINRA discovery guide governs the types of documents and information that must be exchanged by the opposing parties in a securities arbitration proceeding. FINRA arbitrators also use the guide to settle disputes that arise regarding the admission of contested documents and information.

The approved changes reduce the number of lists used to categorize the documents that must be exchanged from 14 to two, but expand the list of "typical" documents that both parties must provide. FINRA expects the changes to make the process smoother and less cumbersome for all of the parties involved, but that remains to be seen.

Some investor advocates say the changes could have unintended effects such as making it more difficult to overcome the assumption that the items listed in the guide are the only documents necessary to an investor's case. Securities arbitration attorneys say such an effect could make it more difficult to admit non-listed, case-specific discovery items.

The SEC seems to recognize the potential for problems and has required the establishment of a FINRA task force to evaluate the practical effects of the changes. According to the Newswire, the task force will convene six months after the changes take effect.