Schwab Ruling Favors Broker-dealers, Disserves Average Investors

A Financial Industry Regulatory Authority Inc. hearing panel dismissed two of three counts FINRA brought against Charles Schwab Corp. a year ago in a case involving Schwab’s pre-dispute arbitration agreements.

According to the panel, the language used in Schwab’s customer agreements to prohibit participation in judicial class actions violates FINRA’s rules. However, FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act.

This ruling means brokerage firms can potentially use arbitration agreements like Schwab’s to prohibit customers from participating in class action cases, thereby insulating themselves from liability.

The panel found that Schwab violated FINRA’s rules by attempting to limit the ability of arbitrators to consolidate individual claims in arbitration. The panel also fined Schwab $500,000, and ordered the firm to remove the offending language from its arbitration agreements and notify customers.

FINRA does not allow class-action claims to be filed in its arbitration system, so precluding customers from pursuing class claims in court effectively kills them.

Responding to FINRA’s ruling, Andrew Miller, FINRA arbitration attorney at Starr Austen & Miller LLP, said “This is a terrible result for the average investor. It effectively insulates broker-dealers from liability for small-value claims that can only effectively be addressed as a class action. The average investor doesn’t have the financial resources to take on broker-dealers for a claim that has a small individual value. Because FINRA does not allow class-action claims to be arbitrated, preventing investors from filing class claims in court effectively kills them.”

Source: Investment News article by Dan Jamieson