The Board of Governors of the Financial Industry Regulatory Authority (FINRA) issued a decision today finding Charles Schwab & Co., Inc. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.
The ruling by the Board affirms in part and reverses in part an earlier FINRA Hearing Panel decision. The Hearing Panel found that Schwab’s waiver violated FINRA rules that limit 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). The Board overturned this finding and determined that the FAA does not preclude FINRA’s enforcement of its rules.
In addition, the Board upheld the Hearing Panel’s determination that Schwab’s attempt to prevent FINRA arbitrators from consolidating more than one party’s claims in a FINRA arbitration forum violated FINRA rules. The Board decision would have remanded the case to the Hearing Panel for a determination of appropriate sanctions. However, Schwab instead entered into a settlement, agreeing to pay a fine of $500,000 and to notify all of its customers that the Class Action Waiver requirement has been withdrawn from its customer account agreements and is no longer in effect. This fully resolves the matter.
FINRA arbitration is a dispute resolution process used in the financial industry to settle disputes between investors, brokerage firms, and registered representatives. Administered by the Financial Industry Regulatory Authority (FINRA), this process offers a faster and less formal alternative to traditional court litigation. Arbitration involves a neutral third-party arbitrator or panel who reviews the evidence and arguments from both sides and makes a binding decision. Unlike court proceedings, arbitration does not involve juries, and the arbitrator’s decision is typically final, with limited grounds for appeal. This method is commonly used for resolving issues such as alleged misconduct, breach of contract, and other disputes related to investment accounts. FINRA arbitration aims to provide a fair and efficient resolution, ensuring that parties can resolve conflicts without the need for prolonged litigation. This process is particularly significant for maintaining trust and integrity in the financial markets.