Senate's takedown of the CFPB's class-action rule may pave way for challenge to Finra policy

Investor advocates fear brokerage firms may seek to overturn Finra's rule banning class-action waivers in customer agreements

Oct 25, 2017 @ 5:09 pm

By Greg Iacurci

After the Senate's rejection Tuesday of the Consumer Financial Protection Bureau's rule on class-action lawsuits, concern is brewing among investor advocates that the financial industry will set its sights on a similar policy at Finra.

The Republican-controlled Senate voted to eliminate a rule issued by the CFPB that would have allowed Americans to bring class-action lawsuits against banks and credit-card companies, many of which insert clauses into contracts with customers that force them into private arbitration to pursue claims.

For years, Finra has had a rule banning such class-action waivers in agreements between broker-dealers and their clients. Now some fear that policy may come under fire.

"I can promise you there are brokerage firms that are salivating at the vote last night, and likely eyeing Finra's rule," Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, said.

"I don't doubt for a minute that Robert Cook is hearing this morning from multiple firms with respect to the waiver removal issue," Mr. Stoltmann added, referring to the CEO of the Financial Industry Regulatory Authority Inc.

Financial firms found themselves in the regulatory and legislative crosshairs during the Obama administration, at which time Congress passed such laws as the Dodd-Frank financial reform law (which created the CFPB) and regulations such as the Department of Labor fiduciary rule.

Now, though, the financial industry has an allies in the White House and Republican-controlled Congress.

In the most recent rollback, the Senate yesterday voted 50-50 (with a tie-breaking vote from Vice President Mike Pence) in favor of a resolution to overturn the CFPB arbitration rule, which was adopted in July. President Donald J. Trump is expected to sign the measure.

The White House has signaled its support of class-action waivers. In a series of pending cases before the Supreme Court, which will be heard next year, the Trump administration argues that class-action lawsuits can be prohibited in arbitration clauses.

The Department of Justice has also said in lawsuits against the fiduciary rule, which raises investment-advice standards in retirement accounts, that it will not defend the rule's class-action provision, the regulation's primary enforcement mechanism.

The CFPB, in an outline of its original rulemaking proposal, cited Finra's arbitration rule; the DOL modeled the fiduciary rule's class-action provision on Finra's.

"I think financial institutions have to think they're on a roll in rolling back these provisions that hold them accountable through class-action litigation," Barbara Roper, director of investor protection at the Consumer Federation of America, said. "I think the idea they'd be willing to leave the Finra rules unchallenged is unlikely in this environment."

Indeed, Finra's policy has been challenged within the last few years. Finra lodged a complaint in 2012 against Charles Schwab & Co., alleging the firm had violated Finra rules by including class-action waivers in more than 6.8 million customer contracts.

Finra's Board of Governors ultimately found that the group's membership agreements, which prevent class-action waivers, trumped the Federal Arbitration Act, and Charles Schwab settled the matter in 2014 for $500,000 and agreed to remove the provision from customer contracts.

Schwab could have appealed Finra's decision to the Securities and Exchange Commission, and further through the court system if necessary, but decided to drop the case instead.

Finra's decision staved off other firms from trying to copy Schwab, and led "literally every single brokerage firm that had a class-action waiver requirement" to remove such a provision, Mr. Stoltmann said.

"The question now is whether Schwab or someone else would put the class-action ban in a contract and either force Finra to back down or litigate it and see how it plays out," Ms. Roper said.

Charles Schwab spokeswoman Mayura Hooper declined comment. Finra spokeswoman Michelle Ong wouldn't speculate on the liklihood of a change in Finra's class action policy.

George H. Friedman, former director of Finra arbitration and an adjunct professor at Fordham University law school, also believes recent developments in Washington will "embolden" brokerage firms, but doubts that Finra will change the policy on its own.

"I think there will definitely be pressure from the industry, saying, 'Take a look at this [rule]. Things have changed,'" Mr. Friedman said.

"Do I think Finra will change its policy? Absolutely not," he added.


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