Wall Street’s own watchdog filed a complaint against Charles SchwabCorp on Wednesday accusing the online brokerage of requiring customers to waive their rights to pursue class actions against the firm, a violation of industry rules.
The Financial Industry Regulatory Authority alleged that San Francisco-based Schwab added a new provision in October to more than 6.8 million customer account agreements that would preclude them from starting or joining class-action lawsuits against the brokerage, according to FINRA’s complaint.
Schwab also required customers to agree that industry arbitrators would not have the authority to consolidate claims from multiple parties. These types of consolidated cases are common, but typically include far fewer claimants than those in a class action court cases.
FINRA, in addition to being Wall Street’s regulator, runs the arbitration forum where customers and brokerage firms typically must resolve legal disputes. FINRA arbitration rules do not allow arbitrators to hear class action cases.
The rules also restrict brokerages from limiting investors’ rights to file cases in court in situations that arbitration rules allow, such as in class actions.
Schwab’s agreement would effectively leave investors in a bind, in which many would not have access to a legal process for recovering their losses, say lawyers.
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.