RECENT FINRA CASES

MARCH 2013

In April of 2011, much of the dispute over whether an arbitration provision could include a class-action waiver was resolved by the U.S. Supreme Court. Its decision in AT&T Mobility v. Concepcion held that held that requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and therefore, to the extent it is mandated by some law rather than consensual, is inconsistent with the Federal Arbitration Act. In other words, an arbitration clause covered by the FAA, at least in most instances, may lawfully include an enforceable waiver of class actions.

Up until now, one of the exceptions to this general principle was the position of FINRA on the issue. FINRA rules provided that that class actions cannot be arbitrated in the FINRA forum and that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated.

In October of 2011, in reliance on AT&T Mobility v. Concepcion, Charles Schwab & Company started inserting into its customer Account Agreements a clause stating that “You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court.”

FINRA immediately initiated a disciplinary action against Schwab on the grounds that the insertion of its purported class action waiver into its arbitration clause violated FINRA rules.

The FINRA arbitration panel charged with hearing the disciplinary proceeding against Schwab has just issued a decision on February 21, 2013 determining that Schwab did in fact have the authority to implement a class-action waiver in its standard customer agreements, notwithstanding the FINRA rules to the contrary. The panel concluded that even though the Schwab contract language violated FINRA rules attempting to preserve judicial class actions, those rules cannot be enforced because the FAA forecloses them as interpreted by Concepcion and other cases.

However, the panel also found that the Schwab language violated the FINRA rule specifying the circumstances in which arbitrators may arbitrate consolidated claims, and ordered Schwab to “cease using the portion of the Waiver purporting to delimit the authority of the arbitrators” to consolidate individual claims. The panel determined that the applicable FINRA rule did not violate the FAA because consolidation of individual (non-representative) claims was not the equivalent of a class action, and fined Schwab $500,000.

The panel’s decision is subject to appeal to, and/or review by FINRA’s National Adjudicatory Counsel, whose decision in turn can be appealed to the SEC. Of course, even if not appealed, it is not binding on other arbitration panels. Nevertheless, unless reversed or the law is otherwise modified, this decision may encourage other companies to insert similar class-action waivers into their customer agreements as well.

 

 

NOTE: THIS DECISION WAS OVERTURNED BY THE FINANCIAL INDUSTRY REGULATORY AUTHORITY BOARD IN APRIL OF 2014.  Rather than continue the fight, Schwab settled the case by agreeing to pay a fine of $500,000 and withdrawing the class action waiver requirement from its account agreements.  Unless successfully challenged by another party, the FINRA ban on class action waivers will be enforced in the future.