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FINRA Appeals Schwab Class-Action Ban Ruling

FINRA is appealing a FINRA hearing panel decision which ruled that a class-action ban in a customer agreement with a brokerage firm is consistent with federal law and recent Supreme Court interpretations of the Federal Arbitration Act (Act).

In October 2011, Charles Schwab amended its customer account agreement to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm (class-action waiver). The amended agreement also included a provision requiring customers to agree that arbitrators in arbitration proceedings would not have the authority to consolidate more than one party's claims (consolidation language). FINRA charged that both provisions violated FINRA rules concerning language or conditions that firms may place in customer agreements.

In February 2013, a FINRA hearing panel concluded that the class-action waiver violated FINRA rules designed to preserve judicial class actions as an alternative to arbitration, even when there is a pre-dispute arbitration agreement. However, the panel concluded that the FINRA rules may not be enforced. The panel held that enforcement is foreclosed by the Act and Supreme Court decisions that held adjudicators must enforce agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act.

If not overturned, the panel's decision may lead other broker-dealers to amend their brokerage contracts to prohibit customers from participating in class-action lawsuits. FINRA could respond to the panel's decision by requiring broker-dealers to abide by "fair play" rules that include access to courts if they wish to remain members of FINRA.

In the same hearing, FINRA did prevail in one of its actions against Schwab. The panel concluded that the consolidation language violated FINRA rules by attempting to limit and contradict a FINRA arbitration rule that specifies circumstances in which arbitrators may arbitrate consolidated claims. The panel further concluded that the Act does not bar enforcement of these rules because the Act does not dictate how an arbitration forum should be governed and operated or prohibit the consolidation of individual claims. The panel fined Schwab $500,000 and ordered it to take corrective action to remove the consolidation language from its agreements.

Sources: Jed Horowitz, Schwab Gets OK to Ban Client Class-Action Suits, Reuters, February 21, 2013; Maureen Brody, FINRA Lets Schwab's Ban on Class Actions Stand, Ignites, February 22, 2013; Department of Enforcement v. Charles Schwab & Company, Inc., FINRA Disciplinary Proceeding No. 2011029760201, February 21, 2013; Caitlin Nish, FINRA to Appeal Ruling on Schwab Class-Action Ban, February 26, 2013.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 103

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