Board Decision Finds Charles Schwab & Co. Violated FINRA Rules by Adding Waiver Provisions in Customer Agreements Prohibiting Customers From Participating in Class Actions; Reverses FINRA Hearing Panel Decision
Schwab Enters into Settlement; $500,000 Fine and Waiver Removal Resolves Matter
WASHINGTON — The Board of Governors of the Financial Industry Regulatory Authority (FINRA) issued a decision today finding Charles Schwab & Co., Inc. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.
The ruling by the Board affirms in part and reverses in part an earlier FINRA Hearing Panel decision. The Hearing Panel found that Schwab's waiver violated FINRA rules that limit the language that firms may place in predispute arbitration agreements but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA). The Board overturned this finding and determined that the FAA does not preclude FINRA's enforcement of its rules.
In addition, the Board upheld the Hearing Panel's determination that Schwab's attempt to prevent FINRA arbitrators from consolidating more than one party's claims in a FINRA arbitration forum violated FINRA rules. The Board decision would have remanded the case to the Hearing Panel for a determination of appropriate sanctions. However, Schwab instead entered into a settlement, agreeing to pay a fine of $500,000 and to notify all of its customers that the Class Action Waiver requirement has been withdrawn from its customer account agreements and is no longer in effect. This fully resolves the matter.
In October 2011, Schwab sent amendments to its customer account agreement to more than 6.8 million investors. The amendments included waiver provisions that required customers to agree that any claims against Schwab be arbitrated solely on an individual basis and that arbitrators had no authority to consolidate more than one party's claims.
FINRA's Board of Governors may call for review and issue a decision involving a matter before the National Adjudicatory Council as was done in this instance. In February 2013, a FINRA Hearing Panel dismissed two of three causes from a February 2012 FINRA complaint. FINRA and Schwab both appealed this decision to the NAC in February 2013.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.