New York Securities Lawyer Blog
On May 16, 2013, Charles Schwab & Company, Inc. (“Schwab”) released a statement that it will remove the Waiver of Class Action or Representative Action clause (“Waiver Clause”) from its customer agreements. Specifically, Schwab announced that it would modify its account agreements to eliminate the Waiver Clause for all disputes raised on or after May 15, 2013. In October 2011, Schwab amended its customer Account Agreement by adding language to include the Waiver Clause, which required Schwab customers to waive their right to participate in a class action lawsuit against the firm, and instead arbitrate any disputes with the broker-dealer on an individual basis before the Financial Industry Regulatory Authority, Inc. (“FINRA”). In February 2012, the FINRA Department of Enforcement (“FINRA Enforcement”) filed a Disciplinary Proceeding Complaint against Schwab alleging that the Waiver Clause in the amended Account Agreement violated various FINRA Rules. See FINRA Disciplinary Proceeding No. 2011029760201. A FINRA Hearing Panel, which was comprised of one Hearing Officer and two other neutral panelists appointed by the Chief Hearing Officer in the FINRA Office of Hearing Officers, presided over the matter and determined that even though the Waiver Clause in Schwab’s amended customer Account Agreement violates FINRA rules, “the Federal Arbitration Act bars enforcement of those rules to the extent that they require that customers be given the option to bring their claims in court in the form of judicial class actions, despite any pre-dispute agreement to resolve disputes in arbitration.” See Hearing Panel Decision, dated February 21, 2013. As such, the FINRA Hearing Panel determined that FINRA could not prevent Schwab from requiring customers to waive their rights to participate in class-action lawsuits since the recent United States Supreme Court Decision in AT&T Mobility LLC vs. Concepcion, 131 S.Ct. 1740 (2011) held that pursuant to the Federal Arbitration Act, class action arbitration waivers in consumer contracts are enforceable, even when class action participation would be preempted. That decision is presently pending on appeal before the National Adjudicatory Council (“NAC”). The inclusion of the Waiver Clause in Schwab’s customer agreements was extremely significant because if the Waiver Clause became effective, Schwab would eliminate the risk of customer class actions. It is conceivable that every other broker-dealer would follow suit, and eventually every customer of a SEC regulated broker-dealer would be precluded from bringing a class action. In its May 16th statement, Schwab made the following representations, “[w]hile the company believes that dispute resolution is the best way to handle via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions. Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.”
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