In a potentially far-reaching decision, a Financial Industry Regulatory Authority Inc. hearing panel has dismissed two of three counts Finra brought against the
Charles Schwab Corp. a year ago in a case involving Schwab's pre-dispute arbitration agreements.
The panel concluded that the “language used in Schwab's customer agreements to prohibit participation in judicial class actions does violate Finra rules, but that Finra may not enforce those rules because they are in conflict with the Federal Arbitration Act,” Finra said in a statement Thursday.
The hearing panel's interpretation of the Federal Arbitration Act opens the door for every brokerage firm to use arbitration agreements like Schwab's and keep customers from participating in class-action cases, said Joel Beck, founder of The Beck Law Firm LLC and a former Finra attorney.
“The potential consequences are huge, because every broker-dealer would like to insulate themselves,” he said.
In a third cause of action, the panel found that Schwab violated Finra rules by attempting to limit the ability of arbitrators to consolidate individual claims in arbitration, the statement said.
For that last violation, the hearing panel fined Schwab $500,000, and ordered the firm to remove the offending language from is arbitration agreements and notify customers.
Either party can appeal to Finra's National Adjudicatory Council. The NAC on its own can also review the case. If no action is taken within 45 days, the decision becomes final.
Finra spokeswoman Nancy Condon said no decisions have been made about an appeal.
“Schwab is pleased with the panel's decision, which ruled in the company's favor on the central class action waiver issue,” said Schwab spokesman Greg Gable in an email.
Schwab feels arbitration is more effective for both the company and its customers, he added.
Because of the importance of the case, Mr. Beck noted that he'd “be surprised if it stands without further review."
Finra does not allow class-action claims to be filed in its arbitration system, so precluding customers from pursuing class claims in court effectively kills them.
Schwab added the disputed language to its agreements in 2011. Finra claimed the new agreements were then sent to almost 7 million Schwab customers.
