Thursday, February 2, 2012
Recently I wrote an article in which I explored the question of why no brokerage firm seeks to attract retail investors by advertising that it does not require its customers to enter into mandatory predispute arbitration agreements. Barbara Black, Can Behavioral Economics Inform Our Understanding of Securities Arbitration?, 12 Transactions: The Tennessee Journal of Business Law 107 (2011). Charles Schwab, apparently, has chosen a different strategy. In fall 2011 the firm amended its customer agreements to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm and also states that arbitrators do not have the authority to consolidate claims. In a blog yesterday, I described FINRA's enforcement proceeding against Schwab, which charges that both these provisions violate FINRA rules.
Schwab has responded to the FINRA action by filing a declaratory judgment action in federal district court in Northern California, seeking a determination that the agreements are enforceable under recent U.S. Supreme Court opinions, AT&T Mobility v. Concepcion and Compucredit Corp. v. Greenwood. As reported in BNA Securities Daily, the company stated that class actions are "unduly expensive and time-consuming, and too often result in little benefit to class members" and that class action waivers are "in the best interests of both its customers and its shareholders."
We now have the Carlyle Group, in its IPO, seeking to bar investors' class claims and Schwab seeking, in its brokerage agreement, to bar customers' class claims. Both are directly attributable to Concepcion. If these provisions are legal and enforceable, securities class claims will soon be a thing of the past; the Supreme Court will have accomplished what millions of lobbyists' dollars could not. Where does the Securities and Exchange Commmission, the self-proclaimed investors' advocate, stand on these developments?