May 17, 2013
Responding to substantial pressure from regulators and the investing public, the brokerage firm Charles Schwab reversed itself and eliminated the class action waiver clause from its pre-dispute arbitration clause in its customer account agreements. See news coverage here. Readers of this blog know from my previous posts that in early 2012 FINRA brought a disciplinary action against Schwab for violating its rules that bar class action waivers in customer agreements. A hearing panel concluded that, while Schwab’s actions did in fact violate FINRA conduct rules, the Federal Arbitration Act precluded enforcement of those rules. That ruling is currently on appeal before FINRA’s National Adjudicatory Council with a decision not expected until late this year. Professor Barbara and I recently filed an amicus brief in that appeal in support of FINRA Enforcement arguing the hearing panel wrongly decided that the FAA bars enforcement of FINRA rules.
Because the ruling threatens to cripple the ability of FINRA to regulate securities arbitration and thus weaken investor protection, federal legislators, state securities regulators, and investor advocacy groups have once again urged the SEC to exercise its authority to eliminate mandatory securities arbitration. Schwab’s strategic misstep may end up being the straw that broke the camel’s back.
Stay tuned for the next installment of FINRA v. Schwab!
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