In a victory for the Financial Industry Regulatory Authority, its Board of Governors has determined that Charles Schwab & Co. (SCHW) violated the self-regulatory organization’s rules when it added waiver language to agreements that prohibited customers from becoming part of any class action cases against the financial firm. Schwab has agreed to settle these claims with a fine of $500,000. Also, it will tell all its customers that the requirement is no longer in effect.
Schwab made amendments to the customer account agreement of over 6.8 million investors in 2011. The move came after it settled a class action securities case accusing the broker-dealer of misleading thousands of customers about its YieldPlus money market fund. (The fund sustained huge losses during the 2008 economic crisis, and to resolve the claims, Schwab agreed to pay $235 million.)
Included in the amendments were waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually. Also, arbitrators would not be able to consolidate consolidated claims for more than one party.
In 2012, Schwab was told to pay a $500,000 fine for making customers agree to this. The firm appealed. The case, however, wasn’t been resolved until now.
The board’s ruling partially reverses and affirms an earlier decision made by a FINRA Hearing Panel. The panel determined that waiver violated FINRA rules that restrict what verbiage financial firms could use in predispute arbitration agreements. It also said that the rules could not be enforced by the SRO as they were in conflict with the Federal Arbitration Act.
The board, however, determined that The Act does not preclude the regulator’s ability to enforce its rules and overturned the earlier finding. It upheld the panel’s finding that Schwab’s effort to stop FINRA arbitrators from putting together multiple parties’ claims was a violation of the regulator’s rules.
Consumer advocates and securities fraud lawyers had worried that Schwab’s efforts to prevent class action lawsuits would establish a precedent and that other brokers would follow suit by adding similar clauses in their own agreements with customers. This could have harmed those investors who can’t afford the expense of arbitration on their own.
The board’s ruling comes even after the decision last year by the US Supreme Court in American Express v. Italian Colors Restaurant. In that 5-3 ruling, the court said that a class action waiver used in contracts with merchants who use American Express’s charge card was enforceable under the Federal Arbitration Act. The merchants had contended that the waiver precluded any class action claims while only allowing individual disputes to be pursued via individual cases in arbitration even though this option could be costlier.
At Shepherd Smith Edwards and Kantas, LTD, LLP, we believe that filing an individual claim increases your chances of getting the maximum recovery possible. You want to work with a securities fraud law firm that experienced in getting investors’ funds back.
Schwab drops ban on clients filing class-action lawsuits, Reuters, April 24, 2014
Board Decision Finds Charles Schwab & Co. Violated FINRA Rules by Adding Waiver Provisions in Customer Agreements Prohibiting Customers From Participating in Class Actions; Reverses FINRA Hearing Panel Decision, FINRA, April 24, 2014
American Express v. Italian Colors Restaurant (PDF)
The Federal Arbitration Act
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Charles Schwab Corp.’s Lawsuit Against FINRA to Stop Enforcement Case is Dismissed by Federal Judge, Stockbroker Fraud Blog, May 16, 2012
Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013