A Financial Industry Regulatory Authority (“FINRA”) panel has dismissed two out of three counts of an enforcement action FINRA brought against Charles Schwab & Co. in February 2012. FINRA’s Complaint was brought after Schwab revised its customer agreement in October 2011 to include provisions that 1) required customers to waive their right to participate in any class-action and 2) to agree that arbitrators had no authority to consolidate more than one customer’s claims.
According to FINRA, these two provisions violated FINRA rules that prohibit member firms from including any language in a pre-arbitration dispute agreement that would limit a customer’s ability to file any claim in court that would be permitted in court and because it attempted to limit the authority of arbitrators to consolidate claims. The FINRA hearing panel concluded that the revised language in Schwab’s customer agreement does violate FINRA’s rules. However, the panel conclued that FINRA could not enforce those rules because they are in conflict with the Federal Arbitration Act.
The panel found in favor of FINRA on the claim that Schwab violated FINRA rules by attempting to limit the authority of arbitrators to consolidate multiple customer’s claims in arbitration. For that violation, the hearing panel fined Schwab $500,000 and ordered it to remove that language from its customer agreements and inform its customers.
FINRA’s rules do not permit the filing of class-action claims in its forum. Precluding customers from bringing class-action claims in court effectively eliminates a customer’s ability to bring a class-action claim at all.
FINRA or Schwab may appeal the decision to the National Adjudicatory Council. If no appeal is made within 45 days, the decision will become final.