Last year, Charles Schwab modified its customer account agreements to
prohibit class-action suits and bar consolidation of individual
arbitrations. FINRA — the financial industry regulatory authority — then charged Schwab with violating FINRA's rules. As we previously reported, Schwab challenged FINRA's action in district court, but the court dismissed the suit for failure to exhaust administrative remedies. Schwab then filed a complaint through FINRA's internal process.
On Thursday, ruling on Schwab's complaint, a FINRA hearing panel held that FINRA's rules are invalid insofar as they would preclude the class-action ban. According to FINRA's press statement, "[t]he panel concluded that the amended language used in Schwab's customer
agreements to prohibit participation in judicial class actions does
violate FINRA rules, but that FINRA may not enforce those rules because
they are in conflict with the Federal Arbitration Act."
On other issues, however, the panel ruled against Schwab. The hearing panel found that Schwab violated FINRA rules by attempting to limit
the powers of FINRA arbitrators to consolidate individual claims in
arbitration. In addition, the panel held that the FAA does not bar
enforcement of FINRA's rules regarding the powers of arbitrators.
FINRA describes itself as "the largest independent regulator for all securities firms
doing business in the United States. Our chief role is to protect
investors by maintaining the fairness of the U.S. capital markets."
