Galvin talks to Chuck about allowing class actions

Massachusetts' top regulator asks Schwab to reconsider forced arbitrations after Finra ruling

Feb 26, 2013 @ 2:56 pm

By Dan Jamieson

Massachusetts Secretary of the Commonwealth William F. Galvin on Tuesday asked Charles R. Schwab, chairman of the Charles Schwab Corp., to rethink his company's use of customer agreements that force all disputes into arbitration and prohibit investors from bringing class action claims.

“I … am calling upon your firm as a good corporate citizen to re-evaluate its position on pre-dispute arbitration clauses that deny investors the choice of a class action lawsuit,” Mr. Galvin said in a letter to Mr. Schwab.

The letter was prompted by a decision last week by a Financial Industry Regulatory Authority Inc. hearing panel upholding Schwab's use of agreements that force customers to bring all disputes into Finra-run arbitration forums.

Precluding customers from pursuing class claims in court effectively kills them.

Mr. Galvin said he was worried that other firms might follow Schwab's lead in curtailing such claims. His spokesperson, Brian McNiff, said the state has not yet seen any other brokerage firms follow suit.

Schwab defends its use of class action waivers as being in the best interest of customers, but Mr. Galvin took issue with that argument.

“Your firm's recent comments praising the [Finra panel] decision and claiming that customers are better served through Finra arbitration are disingenuous,” he wrote.

Class actions are often “the only viable method for small investors to seek redress for the wrongful actions of their brokers,” Mr. Galvin added.

Schwab spokesman Greg Gable countered that Finra has a “great process … for small claims, a streamlined process” with lower costs.

Finra arbitrators can also consolidate small claims, “so there's still an opportunity to get a hearing, no matter the size” of a claim, he said in an interview.

In class actions, “plaintiff's lawyers reap the lion's share of settlements,” Mr. Gable added in an email.

Schwab itself settled a class action in November 2010, when it agreed to pay $235 million to investors who lost money in its ill-fated YieldPlus bond fund.

Mr. Gable did not know how much the company paid out in individual arbitration claims concerning YieldPlus.

Finra brought charges against Schwab a year ago, claiming that the company's arbitration agreement violated its rules that ensure customers can join a class action instead of arbitration. The hearing panel agreed but said that the Federal Arbitration Act prevented Finra from enforcing those rules.

The panel cited several U.S. Supreme Court decisions regarding the FAA.

On Wednesday, the high court will hear oral arguments in yet another case involving arbitration and class action waivers, American Express Co. v. Italian Colors Restaurant.

The plaintiffs in that case are merchants alleging anti-trust violations by American Express. The case addresses whether class action waivers are legal when parties have no practical way of bringing individual arbitration claims.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Ric Edelman: 3 factors transforming the financial advisory industry

We are at the "knee in the curve" of a transformation of the financial advice industry, according to Ric Edelman. But what's next and how will it shape your practice of the future?

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print