Finra-Schwab dispute heats up

Flap stems from brokerage's new arbitration agreement prohibiting customers from filing class action

The Financial Industry Regulatory Authority Inc. has asked a federal court to dismiss an attempt by the Charles Schwab Corp. to fend off a disciplinary action brought against the firm over Schwab’s customer arbitration agreement.
In a court filing yesterday on Thursday, Finra said Schwab could not get an injunction preventing the self-regulator from proceeding with the case.
The dispute stems from a new arbitration agreement Schwab sent to nearly 7 million customers last October, which prevents the firm’s clients from filing a class action claim in court.
Since Finra’s arbitration forum does not hear class claims, Schwab’s agreement essentially precludes customers from bringing class-action claims against the firm.
Finra claims the agreement violates it rules, and filed a disciplinary action against the company on Feb. 1. Finra’s rules do not allow member firms to restrict the rights of customers to go to court for claims that cannot be arbitrated.
After Finra charged the firm, Schwab immediately asked a federal court in California for an injunction to halt the action.
Schwab also wants an expedited opinion from the court on whether Finra can enforce its relevant arbitration rule. Schwab argues that recent U.S. Supreme Court decisions regarding the Federal Arbitration Act support its contention that class claims cannot be exempted from an arbitration agreement.
In a motion to dismiss Schwab’s complaint, Finra said Schwab must follow the administrative remedies mandated by the Securities Exchange Act of 1934. The firm must challenge the case using Finra’s disciplinary system, Finra said, and then make any appeals to the Securities and Exchange Commission and a federal court of appeals.
“Schwab failed to exhaust its administrative remedies – indeed, failed to even begin pursuing its administrative remedies – before filing this improper retaliatory lawsuit,” Finra said in the motion yesterday.
The company is free to raise constitutional questions about Finra’s rules before the SEC and the federal appeals court, Finra said.
Its arbitration code, Finra added, “not only permits class actions to be filed in court, it requires them to remain in court.”
“The Finra rules say no such thing and, even if they did, any such rule would be unenforceable” under the Federal Arbitration Act as interpreted by the Supreme Court, Schwab said in a motion made earlier this week.
“Schwab filed the federal court case to obtain a prompt and public resolution of this issue, which is important not just to Schwab, but to the entire financial services industry,” said Schwab spokesman Greg Gable in an email.
A hearing on the motions is set for April 3.
Finra spokeswoman Michelle Ong said the regulator was not aware of other brokerage firms using arbitration agreement like Schwab’s.
Schwab requires all customers of the firm to sign the agreement, including clients of the independent RIA firms that custody assets at the firm.