Lots of Comments Along Party Lines on FINRA Reg Notice 18-22 on Discovery Guide Change on Insurance
Posted on Categories Arbitration, FINRA Task Force, RulemakingTags , ,

The comment period closed September 24th on Regulatory Notice 18-22, FINRA Requests Comment on Proposed Amendments to Its Discovery Guide to Require Production of Insurance Information in Arbitration, with over 70 comments split along party lines.

As we reported in SAA 2018-29 (Aug. 1), FINRA on July 26th issued RN 18-22. As described on the Website: “FINRA is requesting comment on proposed amendments to the Discovery Guide’s (Guide) Firm/Associated Persons Document Production List (Firm/Associated Persons List) to require firms and associated persons, upon request, to produce documents concerning third-party insurance coverage in a customer arbitration proceeding. The proposed amendments would strictly limit the circumstances under which insurance coverage information could be presented to the arbitrators.” The proposed change has its origins in the Dispute Resolution Task Force. Recall that the group’s Report at pages 41-2 stated: “The task force recommends that the document production list of presumptively discoverable documents for the firm/associated persons to produce be revised to require production of all insurance policies that may be applicable to claimants’ claims.”

Comments Split Along Party Lines

In keeping with the “new normal,” before filing a rule change proposal with the SEC, FINRA issued the Regulatory Notice soliciting comments, which were due September 24th. Nearly 80 comments were received and published, the overwhelming number of which – all supportive – came from investor reps. Just a handful of comments emanated from the industry, and all were negative. We analyze below just a few representative comments posted on the FINRA Website (ed: scroll to the Webpage’s bottom to view comments).

Investor Representatives

Many comment letters contained identical language, indicating that a form letter had been circulated. This language appeared in several letters from investor advocates: “The existence and scope of liability insurance policies is essential information for any attorney if they are to properly advise their investor clients in cases where the respondent is not highly capitalized or self-insured. The ridiculously low net capital requirements for member firms means that many member firms and associated persons are financially unable to satisfy arbitration awards. In too many cases, the ability to pay is an essential consideration when advising clients on whether to take case to hearing or settle, and whether a settlement proposal from either side is fair and reasonable under the circumstances. Without that critical insurance information, claimant attorneys must advise investors on what may be the most important financial decision in their lives without knowing one of the most critical facts. Such a circumstance is inconsistent with FINRA’s ‘Investor Protection’ mandate.”

Letters were also received from several current or former Public members of the National Arbitration and Mediation Committee (“NAMC”), for example: Philip M. Aidikoff, Esq., Robert S. Banks, Esq., Steven B. Caruso, Esq., Samuel B. Edwards, Esq., Seth E. Lipner, Esq., and Mark E. Maddox, Esq.

PIABA: The organization’s letter supporting the change states: “PIABA submits this comment because it believes amending the Discovery Guide to require disclosure of third-party insurance coverage information in customer cases would benefit the investing public. PIABA further believes that this information would reduce the number of unpaid arbitration awards, which is a matter of great concern to the organization and a major problem within the financial industry.”


The few industry comments were all negative, and at times strongly so. None came from law firms:

SIFMA: “The marginal, if any, benefit to claimants of discovering all possible insurance coverages would be far outweighed by the substantial costs to well-capitalized firms of reviewing and producing such documents, engaging in discovery disputes, and suffering potential prejudice in the arbitration proceeding as a result. Regardless, and in addition, it would be inappropriate for FINRA to impose a new regulatory obligation that gives customer claimants the sole and unfettered discretion to impose an unnecessary discovery burden on well-capitalized firms.” SIFMA also proposes several changes to the proposal.

Farmers Financial Solutions, LLC: The firm’s Chief Compliance Officer writes that Farmers strongly opposes the change, because “the existence of third-party insurance coverage is simply not relevant to an arbitration proceeding.” It offers an alternative, which is to revise the proposal “to make clear it applies to the third-party insurance policy document only (consisting of the policy form and declarations page)” (emphasis in original)

Robert Keenan, CEO - St. Bernard Financial Services, Inc.: “We believe this to be a very bad proposal. In an arbitration case the focus should be on the amount of harm done, not the ability of an insurance company to pay. As mentioned in the proposal, the matter of the amount of coverage can be very misleading. Sometimes the policy will not cover the claim. In cases of multiple claims resulting from a single event, the limits of coverage are exhausted. Everyone loses in that situation.”

What’s Next?

We imagine staff will analyze and review the comments with the NAMC. Then, it will be off to the Board for authorization to submit a 19b rule filing with the SEC. We expect there to be some minor changes based on the comments and suggestions, but our take is that the guts of the proposal will remain intact.

(ed: *Even though this proposal would not amend the Code of Arbitration Procedure, it would be a significant change to policy and procedure, thus necessitating SEC approval. At least, that’s been the case with prior changes to the Discovery Guide (see Regulatory Notice 13-40, SEC Approves Amendments to Discovery Guide Used in Customer Arbitration Proceedings to Address Electronic Discovery, Product Cases and Affirmations (November 2013)). **We will of course track this one and keep our readers and followers informed.) (SAC Ref. No. 2018-36-01)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.

Read Our Recent Blog