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FINRA’S Ruling in Charles Schwab Case “Kills” Customer Class Actions

The Doss Firm

On February 21, 2013, a FINRA hearing panel dismissed two of three causes in a February 2012 complaint against Charles Schwab & Company. The complaint focused on Charles Schwab’s amendment to its customer agreements to prohibit customers from bringing class actions in court. FINRA brought its disciplinary proceeding that alleged that the provision violated FINRA’s rules that prohibited any provisions in customer agreements that try to take away customers’ rights to bring class actions in court.

In the class action waiver claim, the panel concluded that the amended language used in Schwab’s customer agreements to prohibit participation in judicial class actions violates FINRA rules, but that FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act (FAA).

Furthermore, in the third cause of action the panel found that Schwab violated FINRA rules by attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration. The panel further concluded that the FAA does not bar enforcement of FINRA’s rules regarding the powers of arbitrators, because the FAA does not dictate how an arbitration forum should be governed and operated, or prohibit the consolidation of individual claims.

InvestmentNews wrote that “the hearing panel’s interpretation of the FAA opens the door for every brokerage firm to use arbitration agreements like Schwab’s and keep customers from participating in class-action case. FINRA does not allow class-action claims to be filed in its arbitration system, so precluding customers from pursuing class claims in court effectively kills them.”

The panel ordered Schwab to take corrective action, including removing violative language, and imposed a fine of $500,000. Furthermore, unless the hearing panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC) or is called for review by the NAC, the hearing panel’s decision becomes final after 45 days.

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