This post was written by Terence Healy and Daniel Herbst.
A recent ruling by a hearing panel of the Financial Industry Regulatory Authority (“FINRA”) could provide a path to effectively kill customer class actions against brokers. On February 21, a FINRA panel upheld an arbitration clause in a Charles Schwab and Co. customer agreement which requires all disputes be brought in a FINRA-run arbitration forum. FINRA does not allow class-action claims in its arbitration system, so the arbitration clause effectively precludes customers from pursuing class action claims in court.
Schwab was an industry frontrunner when it amended its customer agreements to include a mandatory arbitration clause in 2010. At the time, other firms were not using arbitration clauses like Schwab’s because the clause was in direct contravention to FINRA’s rules and guidance on customer agreements. FINRA brought an enforcement arbitration action against Schwab challenging the waiver and seeking penalties.
In a 48 page ruling, the hearing panel found the Federal Arbitration Act (“FAA”) trumps FINRA’s enforcement of its rules. The panel relied on the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 563 U.S. ______(2011), which held that state laws that prohibit contracts from disallowing class-wide arbitration were preempted by the FAA. FINRA has already announced its decision to appeal the ruling. The industry will be watching closely to see the outcome. If the ruling stands, it could signal the beginning of the end of customer class actions against brokerages.