FINRA announced Wednesday that it had filed an administrative complaint against Schwab for violating the agency’s ban on class-action waivers in brokerage customer agreements. The very same day, Schwab and its lawyers at Arnold & Porter filed a declaratory judgment suit against FINRA in federal district court in San Francisco, asking the court to block the agency’s action and to rule that its customer agreements are enforceable.
Schwab adopted the class action waiver provisions last year, shortly after the U.S. Supreme Court ruled in April in AT&T Mobility v. Concepcion that AT&T could enforce similar waivers with its cell phone customers. The Concepcion ruling has already helped a number of companies escape class claims, but FINRA isn’t the only regulator to come down recently against mandatory arbitration. Last month the National Labor Relations Board rejected an arbitration agreement stipulating that employees of homebuilder D.R. Horton could not bring class actions.
Schwab counsel Gilbert Serota of Arnold & Porter declined to comment. The company said in a statement that it believes the class action waivers are “in the best interests of both its customers and its shareholders.” Schwab noted the Concepcion ruling and the Supreme Court’s decision last month in Compucredit Corp. v. Greenwood, which the company said showed that “only a clear Congressional mandate” can void an arbitration agreement under the Federal Arbitration Act.
“FINRA rules are subject to approval by the Securities Exchange Commission under authority given by Congress,” Schwab said in the statement. “But no rule has clearly addressed the issue in dispute here–whether a brokerage firm can adopt a class action waiver in a customer account agreement.”
FINRA, not surprisingly, takes a different view. According to FINRA, Schwab has violated its rules in at least two ways: by barring customers from bringing or participating in class action litigation, and by making them agree that FINRA arbitrators cannot consolidate multiple claims. According to FINRA, Schwab has included the waivers in 50,000 new accounts and in amended agreements sent to 7 million existing customers.
Schwab’s move also doesn’t sit well with some lawyers and academics involved in securities arbitrations. Constantine Katsoris, a law professor at Fordham University, called Schwab’s restriction against consolidated abritrations “outrageous.” He gave the hypothetical example of a husband and wife who would be forced to bring separate arbitrations against Schwab over the same broker and stock. “It’s chaos,” he said. “It’s a way of Schwab discouraging arbitrations.”
But Alan Kaplinsky of Ballard Spahr, an advocate for class action waivers, said in an e-mail that Schwab “makes a good point.” The FINRA rule at issue, he said, does not expressly preclude a class action waiver. Even if it did, the FAA “clearly trumps it” since the federal securities laws from which FINRA derives its authority do not expressly prohibit waivers.