Supreme Court could put pressure on Finra class-action policy

Finra may rethink its ban on class-action waivers in arbitration clauses, depending on whether the court sides with the Trump administration

Jul 7, 2017 @ 1:16 pm

By Mark Schoeff Jr.

If the Supreme Court sides with the Trump administration on the question of class-action litigation in arbitration agreements, it could cause Finra to rethink its policy banning waivers.

In a series of pending cases the court will hear next year, the Trump administration argues that class-action can be prohibited in arbitration clauses, taking a different stance than that of the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, which does not allow class-action waivers in arbitration clauses between brokers and customers.

In a brief filed in the 5th Circuit Court of Appeals in a lawsuit involving the Labor Department fiduciary rule, the regulation's class-action provision is the only one that the Department of Justice did not defend, saying that doing so would contradict the position of the Trump administration in NLRB v. Murphy Oil USA Inc., which the Supreme Court will take up in its next term.

In 2014, the Finra board forced the Charles Schwab Corp. to stop using class-action waivers in its arbitration agreements, following a Schwab appeal of a Finra hearing panel decision. But a Supreme Court ruling could change the atmosphere surrounding the Finra rule.

"Brokerage firms would love the Trump administration to win on this issue," said Andrew Stoltmann, a Chicago securities attorney and the incoming president of the Public Investors Arbitration Bar Association. "It's more likely than not that Finra would try to adopt the position of the Trump administration."

A Finra spokeswoman declined to comment on the pending Supreme Court cases.

But a former director of Finra arbitration doubts that the regulator would be swayed by a Supreme Court decision.

"There would be political pressure brought to bear on Finra to change its policy if the government's position on class-action waivers is upheld by the court," said George Friedman, an adjunct professor of law at Fordham University. "Finra's policy would withstand a legal challenge. As the regulator, Finra is permitted to establish reasonable regulations governing the conduct of the securities industry."

As an example of Finra going its own way with regard to the Federal Arbitration Act, Mr. Friedman pointed to a FAA rule that allows a participant in an arbitration case to move to vacate a decision within 90 days. In Finra arbitration, securities industry participants only have 30 days to file a motion to vacate.

Finra has considerable latitude, according to Hugh Berkson, a principal at McCarthy Lebit Crystal & Liffman.

"It's up to Finra to enforce its own rules with its own members," said Mr. Berkson, who is on the PIABA board. "One hopes it will."

Finra is especially protective of the arbitration forum that it administers. Nearly every brokerage contract includes a mandatory arbitration clause that is heard by a panel of Finra arbitrators.

"The arbitration system is something Finra takes great pride in, and I don't think it will give in to pressure from any side to make substantial changes to the system," Mr. Berkson said.

Although the Trump administration and Finra diverge on class-action waivers, they're in sync on arbitration as a means of remediation.

"There's no question this administration is pro-arbitration," Mr. Friedman said.


What do you think?

View comments

Recommended for you

Featured video


The power of automation

With good data and great workflow processes, advisers can outpace the competition. Junxure's Robert DeFrancis offers some strategies for success.

Latest news & opinion

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print