By: Thomas Abrahamson, Spring 2014 Student Intern
On April 24, 2014, the Financial Industry Regulatory Authority (FINRA) Board of Governors held that Charles Schwab violated FINRA rules by barring investors from participating in class actions by including class action waivers in their customer account agreements, partially reversing an earlier hearing panel decision.
In October 2011, Charles Schwab sent amended customer account agreements to more than 6.8 million of its customers. The amendment included a “waiver of class action or representative action” requiring customers to give up their rights to bring or participate in class actions against Schwab and for a FINRA arbitrator to consolidate more than one party’s claims in a single proceeding.
Once FINRA became aware of Charles Schwab’s actions, its Department of Enforcement commenced an investigation and filed a complaint in February 2012. Two central questions were presented in the complaint: 1) whether Charles Schwab’s waiver conflicted with FINRA rules, and 2) if so, whether the Federal Arbitration Act (FAA) preempts enforcement of the FINRA rules.
On February 21, 2013, a FINRA hearing panel held that Schwab had in fact violated FINRA rules. FINRA Rules 2268(d)(3) and (d)(1), along with Rule 12204 of the Customer Code prohibit FINRA members, like Charles Schwab, from including class action waivers in customer agreements. However, it also found that the FAA would not permit FINRA to enforce its rule prohibiting class action waivers. The hearing panel found no clear expression of congressional intent to preserve judicial class actions as an option for customer claims when there is an agreement for arbitration of those claims. The hearing panel did allow FINRA to enforce its rules concerning whether arbitrators could consolidate claims.
The hearing panel’s decision resulted in much press last year, and FINRA promptly appealed the decision to its Board of Governors. In its long-awaited decision, the Board of Governors affirmed the hearing panel’s decision that Charles Schwab’s waiver agreement, in its entirety, violated FINRA rules. The Board then reversed the panel, holding that the FAA did not preclude FINRA from enforcing its rules prohibiting class action waivers.
The Board decision would have remanded the case to the hearing panel for a determination of appropriate sanctions. Charles Schwab instead entered into a settlement, known as an Acceptance Waiver and Consent (AWC), agreeing to pay a $500,000 fine and to notify all of its customers that the class action waiver has been withdrawn from its customer account agreements and is no longer in effect.