[ by Larry Goldfarb ]

FINRA locked horns with Charles Schwab & Company.  At stake was Schwab’s amended customer agreement which

• barred customers from participating in judicial class actions
• limited the powers of FINRA arbitrators to consolidate individual claims in arbitration.

The case was brought before a FINRA Hearing Panel - in other words, a home game for the regulator.  Nevertheless, Schwab prevailed, 2 to 1. 

FINRA brought two causes of action in the class action issue - regarding new provisions in customer agreements. 

• While the panel agreed with FINRA that the amended language in Schwab's customer agreements - i.e., re: 'prohibiting participation in judicial class actions' - does, in fact, violate FINRA rules, the panel further concluded that FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act (FAA).  The panel stated that FAA takes precedent and thus preempts enforcement of FINRA rules. 

FINRA's third cause of action pertained to other new language in Schwab's customer agreements.

• Here, FINRA avoided a shutout when the panel concluded that Schwab's new language purporting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration violates FINRA  rules - including FINRA Arbitration Rule 12312, that specifies circumstances in which arbitrators may arbitrate consolidated claims.  

Schwab's Victory Did Not Come Without a Price.   The panel ordered Schwab to take corrective action, including removing violative language, and imposed a fine of $500,000.  The hearing panel's decision become final after 45 days.  Either party may appeal to FINRA's NAC - National Adjudicatory Council.

For further details, go to:   [FINRA News Release, 2/21/13] and [FINRA AWC #2011029760201, Office of Hearing Officers].