Thursday, February 23, 2012
We previously blogged that Charles Schwab has filed a declaratory judgment action against FINRA, in response to FINRA's institution of a disciplinary proceeding against the firm for requiring its customers to accept a class action waiver in its customers' agreements. Schwab asserts that (1) FINRA Rule 2268(d)(3) does not prohibit the firm from including a class action waiver in its customer agreements, and (2) even if it does, the FAA and the recent Supreme Court decision in AT&T Mobility v. Concepcion preempt FINRA's prohibition. Schwab fails to acknowlege (much less address) the argument that the Securities Exchange Act and its anti-waiver clause preempt the FAA. On Feb. 21, 2012 Schwab filed a motion for preliminary injunction, reasserting its arguments.
On Feb. 22, FINRA in turn filed a Motion to Dismiss for lack of subject matter jurisdiction, asserting as its principal argument that Schwab failed to exhaust its administrative remedies under the Exchange Act. The Exchange Act establishes a comprehensive system of regulating broker-dealers, including judicial review of FINRA disciplinary proceedings. Noting the Schwab instituted this judicial proceeding within hours after the disciplinary complaint was served, FINRA argues that Schwab failed to meet the prerequisite for filing a federal law suit -- exhaustion of its administrative remedies. Moreover, Schwab does not assert valid reasons for bypassing the disciplinary proceeding -- either that the disciplinary proceeding is too time-consuming or that the FINRA and SEC adjudicators lack the expertise to address issues outside of securities law or FINRA rules.
A hearing is scheduled for April 3.