FINRA Member Class-Action Waivers Limited

April 28, 2014
Craig Wendland

Waivers LimitedThe Financial Industry Regulatory Authority (“FINRA”) is the largest independent securities regulator in the U.S.  It provides investor protection, and maintains market integrity via enforcement actions and the resolution of both intra-industry and client-broker disputes.  This is primarily achieved via arbitration procedures instituted before FINRA.

A recent U.S. Supreme Court decision was thought to allow FINRA members to set contractual limitations on class-action claims before FINRA.  Nevertheless, on April 24, 2014, the FINRA Board of Governors held that the Federal Arbitration Act (“FAA”) does not prevent FINRA’s enforcement of its own rules related to class actions… preventing FINRA members’ attempts to limit class-actions.

FINRA and NASD rules provide that customers must arbitrate their disputes with brokers, but requires that class-action claims must be brought in court.  Specifically, FINRA has complementary rules restricting class actions in FINRA arbitrations, but also restricting FINRA firms from using arbitration agreements to defeat putative class actions in court.[1]

In 2011, our Supreme Court’s held via AT&T Mobility v. Concepcion, 563 U.S. 321 (2011), that the FAA preempts state laws governing certain arbitration procedures, including state law that prohibited contracts from disallowing class-wide arbitration.[2]  This was thought to make individual class action suits, presumably including FINRA member class-action arbitrations, much more difficult to pursue.

In October, 2011, Charles Schwab amended its customer agreements to include a customer waiver of rights to bring class-action claims or to consolidate claims, and an agreement to resolve all disputes in individual arbitration, apparently in response to the holding in Concepcion.  The amended agreement was sent to more than 6.8 million of Schwab’s investors for mandatory agreement.

In February, 2012, a FINRA complaint on the issue of Charles Schwab’s amendments was initiated.  After a hearing, the panel concluded that the FINRA rules were unenforceable because they conflicted with the FAA.  Specifically, the Hearing Panel found that Charles Schwab’s waiver violated FINRA rules limiting the language that firms may place in predispute arbitration agreements, but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA), as per the holding in Concepcion.

On April 24, 2014, that decision was overruled by the FINRA Board of Governors.  Specifically, the Board overturned this finding and determined that the FAA does not preclude FINRA’s enforcement of its own rules.

Moreover, the Board upheld the Hearing Panel’s determination that Charles Schwab’s attempted amendments violated FINRA rules and began remand procedures to determine appropriate sanctions for Charles Schwab.  Instead, Charles Schwab settled the matter, agreeing to pay a fine of $500,000 and to notify all of its customers that the Class Action Waiver requirement was ineffectual and had been removed.


[1] See, e.g., FINRA Rule 2268(d); FINRA Rule 12204; FINRA Rule 13204; FINRA Rule 12312

[2] See, e.g., Discovery Bank v. Superior Court, 36 Cal. 4th 148 (2005).