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Charles Schwab & Co. violated regulatory rules by requiring customers to sign a contract with a provision waiving their rights to bring class actions against the firm, according to a complaint filed by the Financial Industry Regulatory Authority (FINRA) on Feb. 1
Schwab is one of the nation’s largest discount brokerage firms, with more than 340 offices nationwide that together employ about 7,000 brokers. It has been a member of FINRA since 1970.
The firm amended its account agreement in October 2011 to include a provision stating that customers have waived their rights to bring a class action suit against Schwab or to participate in class actions against Schwab. The amended agreement was sent to nearly 7 million people.
The amended account agreement also contained a provision requiring to customers to agree that the claims of different customers cannot be consolidated by arbitrators in arbitration proceedings.
Under the terms of the new agreement, it was effective upon notification, the complaint said.
Both provisions violate FINRA rules prohibiting member firms from placing any condition in an account agreement that limits parties’ ability to file claims they are permitted to file in court per the rules of the forums where the claims may be filed under the agreement, the complaint said.
For example, FINRA Rule 12204(d) provides that a firm may not enforce an arbitration agreement against a member of a putative or certified class action unless 1) class certification is denied by a court, 2) the class is decertified for some reason, 3) the member of the putative or certified class action is excluded, or 4) the member withdraws or chooses not to participate in the class.
Regarding the provision that prohibits consolidation claims in arbitration, the FINRA Code of Arbitration Procedure makes it clear that class actions are permitted.
Because Schwab's conduct is ongoing, FINRA is seeking an expedited hearing.
The firm continues to use the agreements containing these provisions. In fact, since October 2011, Schwab has opened more than 50,000 new customer accounts using the amended account agreement.
According to a report from the Associated Press, Schwab disputes that it has violated FINRA rules. The firm has filed suit seeking a declaratory judgment that the class-action waiver provisions are valid per a recent U.S. Supreme Court decision. The suit was filed in federal court in San Francisco, where Schwab is based.
Schwab said it added the class-action waiver provisions to all of its accounts agreements in September after the Supreme Court handed down its decision in AT&T Mobility LLC v. Concepcion. The court held that the Federal Arbitration Act takes precedence over cases or rules requiring access to class actions.
“Schwab believes a federal court is in the best position to properly and efficiently resolve this novel dispute, and intends to defend against any disciplinary action brought by FINRA,” the firm said in a statement.
The disciplinary complaint was filed with FINRA’s Office of Hearing Officers by its Department of Enforcement. The complaint is a first step in a formal proceeding by FINRA. The findings in the complaint have not been proven.
Under FINRA rules, the firm can file a response and request a hearing before a FINRA disciplinary panel.
The complaint is requesting that the panel of hearing officers make findings of fact and conclusion of law that Schwab has violated FINRA rules. It also requests that the panel issue an order that Schwab cease violating the rules.
In addition, the complaint is seeking monetary sanctions, and for Schwab to bear the costs of the proceedings.
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