Yesterday, a Hearing Panel dismissed two claims brought by FINRA against Charles Schwab & Company (the “Broker”), Inc. concerning the Broker’s use of new provisions in customer agreements which provide that any customer claim against the Broker must be arbitrated solely on an individual, case-by-case basis. The provisions provide that customers “waive any right to bring a class action, or any type of representative action” against the Broker or any related third party “in court.” This would force all customer claims to arbitration without exception. Since FINRA rules prohibit class actions in arbitration, the provision would have the effect of barring any class actions against the Broker in any forum.
In response to the use of these new provisions, FINRA brought an enforcement action against the Broker claiming that such class action waivers violate FINRA rules which prohibit members from imposing “limits” on the ability of a party to file a a claim in court if the rules of the of the forum where the claim might otherwise be filed permit filing in court.
According to the Decision,
The first two causes of action in this disciplinary proceeding against Respondent, Charles Schwab & Company, Inc., charge that new provisions in Respondent’s customer agreements by which a customer waives any ability to assert a claim by means of a judicial class action conflict with and violate FINRA Rules 2268(d)(1) and (d)(3) and NASD Rules 3110(f)(4)(A) and (4)(C). These Rules operate to preserve judicial class actions as an alternative to arbitration, even when there is a pre-dispute arbitration agreement between a FINRA member firm and its customer. The Hearing Panel concludes that Respondent’s new language does conflict with and violate these Rules. The Hearing Panel further concludes, however, that these Rules may not be enforced. Enforcement is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce
agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act. Accordingly, the Hearing Panel dismisses the first two causes of action.
FINRA may appeal the hearing panel’s decision to the National Adjudicatory Council or NAC.
Compelling arbitration has been a hot issue over recent years with the Concepcion decision and the enactment of Section 921 of Dodd-Frank which gives the SEC authority to limit or prohibit the use of mandatory arbitration provisions.
Dept. of Enforcement v. Charles Schwab & Company, Inc., Disciplinary Proceeding No. 2011029760201 (Feb. 21, 2013). See the decision here.