The U.S. Financial Industry Regulatory Authority’s (FINRA) board has reversed a hearing panel decision, finding that Charles Schwab & Co. violated its rules by preventing clients from participating in class actions.
FINRA’s board of governors issued a decision Thursday, which founds that the firm violated FINRA’s rules when it attempted to keep investors from participating in class action suits by adding waiver language to customer account agreements.
The decision partly reverses an earlier hearing panel decision, which ruled that Schwab’s waiver violated the rules, but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA). The board disagreed, ruling that the FAA does not preclude FINRA’s enforcement of its rules.
The board also upheld the hearing panel’s decision that Schwab’s attempt to prevent FINRA arbitrators from consolidating more than one party’s claims in a FINRA arbitration forum also violated its rules.
Instead of returning the case to the hearing panel to determine sanctions, the firm entered into a settlement with the regulator, agreeing to pay a fine of US$500,000 and to notify all of its customers that the class action waiver requirement has been withdrawn from its customer account agreements and is no longer in effect.
FINRA’s board can review, and issue a decision, in cases before the National Adjudicatory Council, which it what happened in this case. In February 2013, a hearing panel dismissed two of three causes in a complaint against Schwab; both the firm and the regulator appealed the decision to the NAC in February 2013.
The North American Securities Administrators Association (NASAA) issued a statement supporting the decision. In an amicus brief filed in the case, NASAA argued that the hearing panel erred by refusing to enforce FINRA’s rules prohibiting the use of class action waivers in customer agreements.
“State securities regulators are pleased that today’s decision by FINRA’s board of governors recognizes the danger in Charles Schwab’s attempt to unilaterally change its customer account agreements to force its clients to waive their rights to participate in class-action lawsuits,” said Russ Iuculano, executive director of the NASAA. “Investors should be free to join with other investors through the representative class action process to resolve claims that are too costly to bring independently.”
“Schwab’s decision to include class action waivers in the arbitration provisions of its customer contracts is yet another example of the harmful effects of mandatory arbitration clauses,” added Iuculano, who also called on legislators to pass proposed legislation that would end the use of mandatory pre-dispute agreements by broker-dealers and investment advisers. “These agreements, especially when coupled with class action waivers, effectively eliminate any reasonable chance for retail investors with small-dollar claims to have their claims heard in an unbiased and fair forum,” he said.