More On Legal & Compliancefrom The Advisor's Professional Library
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The Financial Industry Regulatory Authority announced Wednesday that it has filed a complaint against Charles Schwab & Co. charging the firm has violated FINRA's rules by requiring its customers to waive their rights to bring class actions against the firm.
FINRA's complaint charges that in October 2011, Schwab "amended its customer account agreement to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm." Schwab sent the amended agreements to nearly 7 million customers, FINRA says.
The Schwab waiver was also sent to clients of registered investment advisors that custody assets with Schwab, Sarah Bulgatz, director of Corporate Public Relations at Charles Schwab, told AdvisorOne.
The Schwab agreement also included a provision requiring customers to agree that arbitrators in arbitration proceedings would not have the authority to consolidate more than one party's claims. FINRA's complaint charges that both provisions violate FINRA rules concerning language or conditions that firms may place in customer agreements.
FINRA says its complaint “seeks an expedited hearing because Schwab’s conduct is ongoing, as the firm has continued to use account agreements containing these provisions in opening more than 50,000 new customer accounts since October 2011.”
But Schwab filed a declaratory judgment action against FINRA the same day in the U.S. District Court for Northern California. Schwab said it seeks a "court determination that the class action waiver provisions of the arbitration agreement between Schwab and its customers are enforceable under recent United States Supreme Court decisions interpreting the Federal Arbitration Act and are not barred by any FINRA rule."
FINRA, Schwab said, "contends that its rules prohibit use of the class action waiver by brokerage and investment banking firms under its regulatory authority and has stated that it has instituted disciplinary proceedings against Schwab requiring that the class action waiver provision be removed. FINRA claims that its rules are not governed by the Federal Arbitration Act."
Schwab said the firm "believes a federal court is in the best position to properly and efficiently resolve this novel dispute and intends to defend against any disciplinary action brought by FINRA while seeking a prompt judicial determination of the underlying legal issues."
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings in the complaint have not been made, and does not represent a decision. Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution.
Schwab said in its statement that it is "committed to resolving customer disputes fairly and efficiently without litigation through its internal customer advocacy program or by use of FINRA Dispute Resolution, which is called for by the arbitration provisions in Schwab’s customer account agreements. Class litigation is unduly expensive and time-consuming, and too often results in little benefit to the class members."