FINRA Brings Enforcement Action Against Charles Schwab For Class Action Waiver in its Customer Agreement

February 1st, 2012 · 2 Comments

In a very interesting development with implications for the fate of class action waivers in the securities dispute context, FINRA Enforcement filed a complaint today against broker-dealer and FINRA member Charles Schwab for including a class action waiver in its customer agreement. Schwab had amended its customer agreement to include the class action waiver in October 2011. The waiver forced customers to agree not to bring class actions or class arbitrations against Schwab. FINRA charges Schwab with violating NASD Rule 3110(f)(4)(A), now FINRA Rule 2268(d)(1), which prohibits member firms from placing “any condition” in a pre-dispute arbitration agreement that “limits or contradicts the rules of any self-regulatory organizaiton.” In turn, FINRA alleges, Schwab’s class action waiver is a “condition” that contradicts the FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12204(d), which addresses the manner in which customers can bring and participate in class actions against member firms.

It will be interesting to see whether and how Schwab defends against the disciplinary action, as it does appear that the class action waiver provision conflicts with Rule 12204(d). And there is no FAA preemption argument here under AT&T Mobility, because FINRA’s Rules are federal law, approved by the Securities and Exchange Commission under the Securities Exchange Act of 1934.