In early February, FINRA initiated disciplinary proceedings against Charles Schwab & Co. claiming the firm violated FINRA rules by requiring its customers to sign account documents containing broad "class action waivers." FINRA claims Schwab amended its customer agreements in October 2011 to include the waiver language, sent them to approximately 7 million existing customers and required new customers to sign the forms.
FINRA Rule 2268 prohibits member firms from placing "any condition" in a predispute arbitration agreement that "limits or contradicts the rules of any self-regulatory organization." FINRA Rule 12204, meanwhile, provides that customers may participate in class action claims in court.
In addition to the class action waiver language, the amended agreements contain a provision prohibiting customers from consolidating related claims in arbitration. FINRA does not hear class action claims, but arbitration claimants with similar claims against their brokerage firm or broker sometimes join together to prosecute their claims and share the costs of arbitration. The facts giving rise to a claim are often similar for many investors, particularly in the case of a widespread failure of an investment product such as Schwab's YieldPlus funds. Many customers who purchased YieldPlus investments were told those investments were as safe as cash. In reality, however, the fund held significant investments in mortgage backed securities and lost value.
The very same day FINRA initiated its disciplinary proceeding, Schwab filed a federal court complaint against FINRA seeking an injunction halting FINRA's disciplinary proceeding. FINRA recently moved to dismiss that complaint, arguing Schwab could not use the court system to prevent FINRA from exercising its regulatory authority over the firm. Whether the dispute proceeds before FINRA or in court, other member firms are watching from the sidelines to see whether Schwab's class action waivers hold any water.
