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

Featured video


Stephanie Bogan: What's really holding advisers back from achieving their goals

The only thing holding financial advisers back from accomplishing what they want is the assumptions they're making, according to Stephanie Bogan, founder of Educe Inc.

Latest news & opinion

DOL fiduciary rule opponents want to push implementation back until 2019

ICI, Chamber of Commerce among groups asking for delay, while Democratic lawmakers call on DOL to keep to its earlier planned schedule of Jan. 1, 2018.

Take 5: Vanguard's new CIO Greg Davis talks bonds, stocks and costs

Having just stepped into the role, this veteran of the firm now oversees $3.8 trillion in assets in more than 300 mutual funds and exchange-traded funds.

Tech companies deploy behavioral finance tools for advisers

They seek to turn knowing more about clients into growing more revenue.

Retirement planning for women

Longer lifespans and lower savings require creative income strategies.

Sean Spicer resigns as press secretary after Anthony Scaramucci is appointed communications director

Scaramucci is known as an ardent foe of the DOL fiduciary rule, having said during the campaign that Trump would repeal it .


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print