A hearing panel of the Financial Industry Regulatory Authority (“FINRA”) recently issued a decision that has been lauded and decried as the death knell for class actions by securities investors. In 2011, Charles Schwab & Co. revised its customer agreements to include a provision that requires customers to agree not to participate in class action and to submit all disputes with the company to arbitration. In response, FINRA’s enforcement division filed a complaint against Schwab.
On February 21, 2013, the panel dismissed part of the complaint. It ruled that although the class action waiver does violate FINRA rules, following the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), FINRA Rules prohibiting broker-dealers from adopting judicial class-action waivers in customer arbitration agreements are unenforceable and preempted by the Federal Arbitration Act. The panel also determined that arbitration agreements cannot limit the powers of FINRA arbitrators to consolidate individuals’ claims and ordered Schwab to remove anti-consolidation language from its customer agreements and imposed a $500,000 fine. Nevertheless, FINRA’s enforcement division has appealed the decision to the National Adjudicatory Council for review.