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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, February 1, 2012

FINRA: Schwab Improperly Requires Customers to Waive Class Actions

Will Charles Schwab get away with including a class action waiver in its customer agreements?

FINRA announced today that it has filed a complaint against Charles Schwab & Company charging the firm with violating FINRA 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.  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 charges that both provisions violate FINRA rules concerning language or conditions that firms may place in customer agreements. 

Specifically, the class action waiver violates NASD Rule 3110(f)(4)(C) and FINRA Rule 2268(d)(3), both of which prohibit member firms from including any condition in a predispute arbitration agreement that "limits the ability of a party to file any claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement."  The class action waiver also violates NASD Rule 3110(f)(4)(A) and FINRA Rule 2268(d)(1), which prohibit member firms from including any condition in the agreement that limits or contradicts the rules of any self-regulatory organization," because Rule 12204(d) provides that customers can bring and participate in class actions in the manner provided in the rule.  Similarly, the provision that purports to limit the ability of arbitrators to consolidate claims of more than one party violates NASD Rule 3110(f)(4)(A) and FINRA Rule 2268(d)(1) because it contradicts Rule 12312(a) and (b) that provide that arbitrators have the authority to consolidate claims under certain curcumstances.

FINRA's 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.

Download FINRA.SchwabComplaint

 

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