Proceeding Number 2011029760201

Hearing Panel Decision Granting in Part and Denying in Part the Parties’ Cross-Motions for Summary Disposition in Department of Enforcement v. Charles Schwab & Company, Inc.

February 21, 2013

The first two causes of action in this disciplinary proceeding against Respondent, Charles Schwab & Company, Inc., charge that new provisions in Respondent’s customer agreements by which a customer waives any ability to assert a claim by means of a judicial class action conflict with and violate FINRA Rules 2268(d)(1) and (d)(3) and NASD Rules 3110(f)(4)(A) and (4)(C). These Rules operate to preserve judicial class actions as an alternative to arbitration, even when there is a pre-dispute arbitration agreement between a FINRA member firm and its customer. The Hearing Panel concludes that Respondent’s new language does conflict with and violate these Rules. The Hearing Panel further concludes, however, that these Rules may not be enforced. Enforcement is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act. Accordingly, the Hearing Panel dismisses the first two causes of action.


The third cause of action charges that other new language in Respondent’s customer agreements requiring customers to agree that arbitrators have no power to consolidate more than one party’s claims in arbitration violates FINRA Rule 2268(d)(1) and NASD Rule 3110(f)(4)(A) by attempting to “limit” and “contradict” FINRA Arbitration Rule 12312. FINRA Arbitration Rule 12312 specifies circumstances in which arbitrators may arbitrate consolidated claims. The Hearing Panel concludes that the new language purporting to limit the powers of FINRA arbitrators violates FINRA Rule 2268(d)(1) and NASD Rule 3110(f)(4)(A) in two respects: (i) the consolidation language undermines the fundamental operation of Rule 12312 and, in fact, the overall operation of FINRA Arbitration Rules generally, by depriving FINRA of its authority to grant and circumscribe the powers of arbitrators in FINRA’s forum; and (ii) the consolidation language contravenes the specific authority given to the arbitrators to join individual claims in specified circumstances. The Hearing Panel further concludes that the Federal Arbitration Act does not bar enforcement of these Rules, because the Act does not dictate how an arbitration forum should be governed and operated or prohibit the consolidation of individual claims.


In each cause of action, Enforcement also alleged that, by virtue of the other alleged Rule violations, Schwab violated FINRA Rule 2010. The Hearing Panel concludes that by virtue of the violation found in the third cause of action, Respondent also violated FINRA Rule 2010.


For the violations found as to the third cause of action (NASD Rule 3110(f)(4)(A) and FINRA Rules 2268(d)(1) and 2010), Respondent is ordered to take corrective action, which includes removing the violative language from customer agreements, and sending promptly to all customers whose customer agreements were amended or created with the violative language a notice indicating that the prior limitation on the powers of FINRA arbitrators is not effective. The notice should reiterate that Schwab agrees to arbitrate in accord with FINRA Arbitration Rules, as amended from time to time, and indicate that consolidation is available in arbitration pursuant to those Rules. In addition, Respondent is ordered to pay a fine of $500,000 and the hearing costs.


This decision has been appealed.

View Decision (PDF 166 KB)