More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
A Financial Industry Regulatory Authority disciplinary panel on Thursday upheld Charles Schwab’s decision to include a class-action waiver in its customer arbitration agreements. The waiver requires that all disputes between Schwab and its customers be arbitrated, and waives each party’s right to bring class-action claims against the other.
However, the panel ordered Schwab to take corrective action and ordered Schwab to pay a fine of $500,000 for “attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration.”
The FINRA panel stated that it had dismissed two of three causes in a February 2012 complaint against Charles Schwab & Co. regarding Schwab asking its customers to waive their rights to bring class actions against the firm.
The 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 (FAA).”
Schwab issued a statement the same day saying that “Schwab is pleased with the panel’s decision, which ruled in the company’s favor on the central class action waiver issue.”
The statement went on to say that Schwab “believes customers are better served through the existing FINRA arbitration process and that class-action lawsuits are a cumbersome and less effective means of resolving disputes—for both parties. Based on the panel’s favorable ruling, all customer claims must be heard in arbitration through the well-established and highly regarded FINRA arbitration forum, where matters are adjudicated more quickly and efficiently than in court proceedings.”
FINRA Dispute Resolution, Schwab continued, “runs one of the country’s largest alternate dispute resolution forums and has effective programs for both large and small cases. Filing fees vary with the size of claims and may be waived in the case of hardship. For these reasons, Schwab believes that a class-action waiver is in the best interests of both its customers and its shareholders.”
But in the third cause of action, the FINRA panel found that Schwab violated FINRA rules “by attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration. The panel further concluded that the FAA does not bar enforcement of FINRA’s rules regarding the powers of arbitrators, because the FAA does not dictate how an arbitration forum should be governed and operated, or prohibit the consolidation of individual claims.”
Thus, the panel ordered Schwab to take corrective action, including removing “violative language,” and imposed a fine of $500,000.
In its complaint, FINRA explains that its Enforcement Department had charged Schwab with “violating FINRA rules concerning language or conditions that firms may place in customer agreements when 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.” The 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 charged 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 said in its original complaint.
The Schwab waiver was also sent to clients of registered investment advisors that custody assets with Schwab.
Unless the hearing panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC) or is called for review by the NAC, FINRA says the hearing panel’s decision becomes final after 45 days.