The Financial Industry Regulatory Authority (Finra) has charged Charles Schwab & Co. with violating Finra's rules by requiring customers to waive their right to bring a class action against the financial firm.
Finra, the independent regulator for all securities firms doing business in the U.S., claims that Schwab in October 2011 amended its customer account agreement to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm. Schwab sent the amended agreements to nearly 7 million customers.
Finra also claims that Schwab's agreement also includes a provision requiring customers to agree that arbitrators in arbitration proceedings would not have the authority to consolidate more than one party's claims. Finra also charges that both provisions violate Finra rules concerning language or conditions that firms may place in customer agreements.
In response, Charles Schwab has filed a declaratory judgment action against Finra in U.S. District Court for the Northern District of California. Schwab is seeking a court determination that the class action waiver provisions of the arbitration agreement between Schwab and its customers are enforceable under recent U.S. Supreme Court decisions interpreting the Federal Arbitration Act and are not barred by any Finra rule.
"Finra contends that its rules prohibit use of the class action waiver by brokerage and investment banking firms under its regulatory authority and has stated that it has instituted disciplinary proceedings against Schwab requiring that the class action waiver provision be removed," according to Schwab's statement. "Finra claims that its rules are not governed by the Federal Arbitration Act.''
"Schwab believes a federal court is in the best position to properly and efficiently resolve this novel dispute and intends to defend against any disciplinary action brought by Finra while seeking a prompt judicial determination of the underlying legal issues," the statement continues.
Schwab in its statement says that the company added a class action waiver provision to all of its customer account agreements in September 2011 following the Supreme Court's decision in AT&T Mobility LLC v. Concepcion. Schwab claims that in that case, the court held that the Federal Arbitration Act preempts cases or statutes that require access to class action procedures.
"Following Concepcion, on January 10, 2012, the Supreme Court held in Compucredit Corp. v. Greenwood that only a clear Congressional mandate can preclude enforcement of an arbitration agreement under the FAA," according to Schwab. "Finra rules are subject to approval by the Securities and Exchange Commission under authority given by Congress. But no rule has clearly addressed the issue in dispute here -- whether a brokerage firm can adopt a class action waiver in a customer account agreement."
"Schwab is confident that the court will find that Finra's attempt to prohibit class action waivers is barred by the Federal Arbitration Act," according to Schwab's statement.
Finra is seeking an expedited hearing because it claims that Schwab's conduct is ongoing, as the firm has continued to use account agreements containing these provisions in opening more than 50,000 new customer accounts since October 2011.
The issuance of a disciplinary complaint by Finra represents the beginning of a formal proceeding in which the findings in the complaint have not been made, and it does not represent a decision.
Under Finra rules, a firm or individual named in a complaint can file a response and request a hearing before a Finra disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, giving up any gains associated with the violations, and payment of restitution.