Securities Law Prof Blog

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

Monday, May 14, 2012

Court Dismisses Schwab's Challenge to FINRA Rule For Failure to Exhaust Administrative Remedies

Regular readers of this blog will recall that Charles Schwab and FINRA are involved in a dispute over the SRO's rules that prohibit broker-dealers from requiring customers to give up their rights to bring class actions in court.  Last fall Schwab amended its customers' agreements to include such a prohibition in reliance on AT&T Mobility v. Concepcion.  FINRA promptly brought a disciplinary proceeding against the firm, and Schwab, in turn, brought an action in federal district court seeking a declaratory judgment that FINRA could not enforce its rules, first, because the FINRA rules do not really prohibit class action waivers and, second, even if it does, the rules violate the FAA.

On May 11, the federal district court granted FINRA's motion to dismiss the complaint because the court lacks jurisdiction to hear the case.  The court held that Schwab failed to exhaust its administrative remedies and that the failure to exhaust administrative remedies is jurisdictional.  In addition, even if failure to exhaust is only an element of a claim, Schwab failed to show that it meets the requirements for an exception to the requirement of administrative exhaustion.

The 21-page opinion emphasizes that the issues involved in this case are squarely within the expertise of FINRA and the SEC and do not involve any constitutional claims (unlike the issues in SEC v. Gupta dealing with retroactive application of Dodd-Frank).

Charles Schwab & Co., Inc. v. FINRA (N.D. Cal. May 11, 2012) (Download Order Granting Def's MTD)

Judicial Opinions, Securities Arbitration | Permalink

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