A FINRA hearing panel has dismissed two of the three charges FINRA brought against Charles Schwab Corp. over pre-dispute arbitration agreements.
The panel found that, although language in the agreements violates FINRA rules, FINRA cannot enforce the rules because they are in conflict with the Federal Arbitration Act.
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The decision has far-reaching implications. It opens the door for other firms to adopt arbitration agreements like Schwab’s that essentially preclude clients from participating in class-action suits.
Every broker-dealer would like to insulate themselves against class-action litigation—or any other type, for that matter.
The third charge against Schwab involved an attempt to limit the liability of arbitrators to consolidate individual claims in arbitration.
FINRA ordered Schwab to eliminate that language from its agreements and fined the firm $500,000.
The decision can be appealed to FINRA’s National Adjudicatory Council (NAC). The NAC can also take the first step and decide to review the case. If nothing is done after 45 days, the decision becomes final.
So far, Schwab has not commented about making an appeal. The firm feels arbitration is more effective for both it and its clients.
But the case is an important one so some type of review is likely. FINRA does not allow class-action claims to be filed within its arbitration system so precluding class action
by clients in court effectively does away with them.