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Despite FINRA Rule, Schwab's Customer Arbitration Demand Upheld

Joe Mont | February 22, 2013

In a decision that could alter how clients take action against brokerage firms, a Financial Industry Regulatory Authority panel has ruled that Charles Schwab Corp. had the right to bar customers from engaging in class action lawsuits against it.

In September 2011, Schwab amended its customer account agreement to include a class-action waiver provision, requiring that all disputes be arbitrated. FINRA's Enforcement Department challenged the move because its rules prohibit the use of class action waivers by brokerage and investment banking firms. On Thursday, a Financial Industry Regulatory Authority disciplinary panel upheld Schwab's decision to do so anyway.

Schwab, over the course of the year, has argued that legal precedent established by the Supreme Court in AT&T Mobility LLC v. Concepcion and Compucredit Corp. v. Greenwood held that that federal regulations must also comply with the Federal Arbitration Act, which requires that parties agreeing to arbitration must do so instead of going to court. It also precludes state and federal courts from invalidating arbitration clauses.

FINRA had countered that its rules are not governed by the FAA. The disciplinary panel, however, found that because its rules are subject to approval by the Securities Exchange Commission it must comply with federal statutes, including the FAA.  

Schwab's post-decision statement reiterates its claim that “customers are better served through the existing FINRA arbitration process” and “class action lawsuits are a cumbersome and less effective means of resolving disputes for both parties.” 

It wasn't all good new for Schwab, however. The panel found that it did violate FINRA rules by attempting to prevent the consolidation of arbitration claims and concluded the FAA does not invalidate rules regarding the powers granted to its arbitrators, nor does it prohibit the consolidation of individual claims or dictate how an arbitration forum should be governed and operated. Schwab was ordered to remove that specific language and was assessed a fine of $500,000.

Unless it is appealed to FINRA's National Adjudicatory Council, the hearing panel's decision will become final in 45 days.