February 21, 2013

FINRA Hearing Panel Concludes that FAA Preempts Enforcement of FINRA Rules Barring Class Action Waiver in Broker-Dealer’s Customer Agreement

By Jill Gross

FINRA’s Office of Hearing Officers issued its decision today in Dep’t of Enforcement v. Charles Schwab & Co, an enforcement action in which FINRA alleged that Schwab’s class action and joinder waiver language in its customer agreement violated FINRA rules that preserved the judicial class action remedy for investors and empowered arbitrators to consolidate non-class though similar claims.  For more details about the background and the facts of the enforcement action, see my previous blog posts about this case here, here, here and here.

In today’s ruling, the hearing panel concluded that the FAA preempted the FINRA rules with respect to the class action waiver, but did not preempt the rules that expressly authorized arbitrators to consolidate claims.  The panel dismissed Enforcement’s causes of action against Schwab that sought sanctions for inserting the class action waiver in its customer agreement.  On the remaining cause of action that sought sanctions against Schwab for including the joinder waiver language, the panel found that Schwab did violate the FINRA rule, and that the FAA did not preempt enforcement of that rule.  As a sanction, the panel ordered Schwab to take corrective action and imposed a $500,000 fine.

I do not agree with the decision, as I believe that FINRA’s rules with respect to the class action waiver as well as the joinder waiver displace the FAA.  For the reasons why, see this article I co-authored with Prof. Barbara Black (Cincinnati).  I am keeping my eyes out for an appeal of the decision to FINRA’s National Adjudicatory Council (NAC).

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