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Enforcement in the Second Circuit of FINRA Pre-Hearing Subpoenas and Discovery Orders

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Published On: November 14, 2016

In a Financial Industry Regulatory Authority ("FINRA”) arbitration under either the Consumer or Industry Arbitration Rules, there are two mechanisms for seeking discovery.  For parties and non-parties who are not FINRA members, FINRA Rules 12512 and 13512, authorize an arbitrator to issue a subpoena for production of documents.  For parties and FINRA members, FINRA Rules 12513 and 13513, authorize an arbitrator to issue an arbitration order (not a subpoena) for the production of documents. However it is unlikely that a party seeking enforcement of either the subpoena or the order issued by a FINRA arbitration panel will find relief in the court system. But that doesn’t leave enforcement out of reach.

Parties and Non-Parties who are not FINRA members

FINRA Rules 12512 and 13512 authorize an arbitrator to issue subpoenas for the production of documents. FINRA Rules 12512(a)(1) and 13512(a)(1).  If the subpoena is not complied with, the next step for most litigators would be to move to enforce the subpoena in Federal District Court.  However such an action is unlikely to be successful.  

There is split among the Circuits but the Second Circuit interprets the Federal Arbitration Act (“FAA”) Section 7 as prohibiting enforcement of subpoenas for pre-hearing discovery.  See Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210, 212 (2d Cir. 2008).  However the Second Circuit court made it clear that,

[i]nterpreting section 7 according to its plain meaning "does not leave arbitrators powerless" to order the production of documents. Hay Group v. E.B.S. Acquisition Corp., 360 F.3d 404, 413 (3d Cir. 2004) (Chertoff, J., concurring). On the contrary, arbitrators may, consistent with section 7, order "any person" to produce documents so long as that person is called as a witness at a hearing. 9 U.S.C. § 7. Peachtree concedes as much, admitting that "Syndicate 102 could obtain access to the requested documents by having the arbitration panel subpoena Peachtree to appear before the panel and produce the documents." In Stolt-Nielsen, we held that arbitral section 7 authority is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters. 430 F.3d at 577-79. As then-Judge Chertoff noted in his concurring opinion in Hay Group, the inconvenience of making a personal appearance may cause the testifying witness to "deliver the documents and waive presence." 360 F.3d at 413 (Chertoff, J., concurring). Arbitrators also "have the power to compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings." Id. at 413. Section 7's presence requirement, however, forces the party seeking the non-party discovery -- and the arbitrators authorizing it -- to consider whether production is truly necessary. See id. at 414. Separately, we note that where the non-party to the arbitration is a party to the arbitration agreement, there may be instances where formal joinder is appropriate, enabling arbitrators to exercise their contractual jurisdiction over parties before them. In sum, arbitrators possess a variety of tools to compel discovery from non-parties. However, those relying on section 7 of the FAA must do so according to its plain text, which requires that documents be produced by a testifying witness.

Life Receivables Trust v. Syndicate 102 at Lloyd's of London, 549 F.3d 210, 218, (2d Cir. N.Y. 2008).  To obtain the aid of the Court system, the Second Circuit quoting from the Third Circuit clearly indicates that the arbitrators must order an appearance in some fashion of the object of the subpoena.  Accordingly if such an appearance is ordered, then Section 7 of the FAA is no longer a prohibition against the production of the documents even if it is a pre-hearing appearance.  

Parties and FINRA Members

FINRA Rules 12513 and 13513 authorize an arbitrator to issue a discovery order for the production of documents.  If the discovery order is not complied with there is no opportunity to turn to the court system for enforcement relief because there was no actual subpoena issued.  However, turning to FINRA’s Department of Enforcement is likely to be successful.

Enforcement of a pre-hearing discovery order, issued to a non-party FINRA member under FINRA rule 13513, is largely an issue of first impression. By way of background, FINRA Rule 13513 went into effect in its current form on February 18, 2013.  Since that time there does not appear to have been any enforcement action by the FINRA Department of Enforcement for its violation.  However, there is at least one enforcement action for violation of a party’s discovery obligations in an arbitration proceeding.  See In Re Westrock Advisors.  It is a violation of FINRA Rule IM-13000 to fail to comply with any rule of the arbitration code and specifically for failure to produce a document:

It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to:

… (c) fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the Code;…

In Westrock Advisors failure to comply with discovery orders was censured and a $50,000 fine was imposed.

Conclusion

Accordingly, enforcement of a subpoena or discovery order without use of the Court system is both possible and likely to be successful in obtaining documents in pre-hearing discovery from parties, non-parties, FINRA members and Non-FINRA members alike.