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 next


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print