FINRA and Charles Schwab lock horns over class action waivers

The Financial Industry Regulatory Authority Inc. (“FINRA”) and The Charles Schwab Corporation are engaged in a legal fight over whether a brokerage firm can avoid customer class-action claims by forcing all disputes into FINRA arbitration forums.

In a complaint filed against Schwab on February 1, FINRA claims that the brokerage is violating rules by including in arbitration agreements sent to almost 7 million customers a provision requiring investors to waive their rights to bring or participate in class actions against the firm.

Schwab has fired back, asking a federal court in California for an expedited opinion on whether or not the recent U.S. Supreme Court decision, AT&T v. Concepcion, lets it prevent class claims via an arbitration agreement.

In a statement, Schwab said it added the class action waiver in September 2011 after the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, in which the court held that the Federal Arbitration Act pre-empts laws that ensure rights to file class actions.

The FAA, passed in 1925, supported the role of private dispute resolution by ensuring that agreements to arbitrate are upheld.

But FINRA does not allow class actions to be filed in its arbitration system, and it prohibits brokerage firms from limiting customers’ abilities to file claims in court that are not covered or allowed in arbitration.

FINRA also contends that Schwab improperly required customers to agree that arbitrators could not consolidate multiple claims against the firm into one proceeding, a process that is allowed.

The outcome will hinge on whether the FAA trumps the Securities and Exchange Act of 1934, which gives SEC rule-making authority over FINRA, including its arbitration program.

In an analyst presentation on February 2nd, Schwab Chief Executive Walt Bettinger said the company would reimburse arbitration filing fees to clients until the issue is resolved.

It appears that FINRA wants to get tough on firms that it thinks skirt arbitration rules.

Last month, Merrill Lynch Pierce Fenner & Smith Inc. agreed to pay $1 million to settle allegations that it circumvented FINRA rules requiring arbitration of employee disputes.  The case arose after Merrill pursued brokers for unpaid promissory notes in New York state courts, where it enjoys legal advantages.

FINRA may be concerned about the SEC mandate to examine securities arbitration under the Dodd-Frank reform law.  FINRA may want it to look like they take very seriously the investor protection function in the arbitration arena.

Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.


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