Supremes give Schwab a boost over Finra in arbitration scuffle

High court ruling tips scales in favor of class action waivers

Jun 30, 2013 @ 12:01 am

By Dan Jamieson

finra, charles schwab, arbitration, class action, waiver, supreme court
+ Zoom
(Photo: Bloomberg News)

The Charles Schwab Corp.'s continuing fight with Finra over its use of class action waivers in arbitration agreements received a boost from an unlikely source: the U.S. Supreme Court.

In a 5-3 decision June 20, the court said a class action waiver used by American Express Co. in contracts with merchants who use its charge card is enforceable under the Federal Arbitration Act of 1925. The merchants had argued that AmEx's waiver, which precludes any class claims and mandates that all disputes be heard as individual arbitrations, effectively killed their right to bring an antitrust action because the cost of pursuing an antitrust case in arbitration would not make economic sense.

In the Financial Industry Regulatory Authority Inc.'s case against Schwab, a Finra hearing panel this year similarly ruled that the FAA prevented the self-regulatory organization from enforcing its rules that ban the controversial waivers. The panel cited a 2011 Supreme Court case, AT&T Mobility LLC v. Concepcion, in which the high court threw out a California law banning class action waivers in consumer arbitration agreements.

The court's recent decision in American Express v. Italian Colors Restaurant “certainly supports Schwab's argument,” said Heath Abshure, Arkansas' securities commissioner and president of the North American Securities Administrators Association Inc.

“I assume Schwab is probably busy drafting a supplemental brief right now that talks about that [American Express] case,” he said.

The decision hurts the argument that Finra and plaintiff's lawyers have been making in the Schwab case, namely that arbitration agreements can't effectively remove legal rights, said Paul Bland, a senior attorney at Public Justice, a public-interest law firm founded by trial lawyers.

“It's significant, but not the end of the ballgame,” he said. “There are several strong arguments to be made that Schwab shouldn't be allowed to break Finra rules.”

The Supreme Court's decision prompted NASAA to call for congressional action to ensure that investors can pursue small claims as a class.

“We think Congress is going to have to act on it,” Mr. Abshure said. “The SEC could [act] under Dodd-Frank, but all indications are, it's not going to, at least anytime soon,” he said.

NASAA is seeking a sponsor for legislation that would allow class claims below a certain threshold, without banning waivers outright.

Finra filed its disciplinary action against Schwab in 2012, claiming that its arbitration agreements wrongly precluded customers from bringing class action claims against the firm in court. After losing before the hearing panel, Finra appealed to its internal-appeals body, the National Adjudicatory Council. A NAC hearing in the case is set to begin in September.

In May, Schwab dropped the class action waiver language from its client arbitration contracts while the case is being litigated.

Spokespeople for both Finra and Schwab declined to comment.


What do you think?

View comments

Recommended for you

Latest news & opinion

The appeal and pitfalls of holding unconventional assets in retirement accounts

While non-traditional asset classes held in individual retirement accounts may have return and portfolio diversification benefits, there are "unique complexities" that limit their value for most investors.

Wells Fargo's move to boost signing bonuses could give it a lift

Wirehouse is seen as trying to shore up adviser ranks that took a hit after banking scandal

New Jersey fines David Lerner Associates for nontraded REIT sales

Firm will pay $650,000 for suitability, compliance and books and records violations.

Report predicts $400 trillion retirement savings gap by 2050

Shortfall driven by longer life spans and disappointing investment returns.

Wells Fargo will ramp up spending to lure brokers

Wirehouse, after losing 400 brokers in first quarter, is bucking trend among rivals who have said they are going to cut back on spending big bucks recruiting veteran advisers


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print