FINRA Reverses Hearing Panel in Schwab Enforcement Case: Class Action Waiver Violates FINRA Rules

ADR Prof Blog by Andrea Schneider, Michael Moffitt, Sarah Cole,Art Hinshaw, Jill Gross and Cynthia Alkon.

In a stunning but hoped-for reversal (based on am amicus brief I co-authored in the case), FINRA’s Board of Governors reversed a disciplinary hearing panel decision in the FINRA v Schwab enforcement action. (See some of my previous blog posts on the subject, here, here and here.) That hearing panel had held, among other things, that Schwab’s class action waiver in its standard customer agreement’s pre-dispute arbitration clause violated FINRA rules but those rules could not be enforced under the Federal Arbitration Act.

FINRA reversed that aspect of the hearing panel decision, and held that the Securities Exchange Act constituted a sufficient Congressional command to overcome the FAA’s mandate to courts to enforce arbitration agreements as written. Since the Exchange Act delegated to the SEC, which in turn delegated to FINRA, the authority to regulate broker-dealers’ arbitration agreements for the protection of investors, FINRA’s rules barring class action waivers and mandating that investors be able to bring class claims in court were enforceable.

This is the precise argument I spelled out in my article with Professor Barbara Black, Investor Protection Meets the Federal Arbitration Act, 1 Stan. J. Complex Litig. 1 ­­(2012).

In my view, this is the right result, both under the law and for investors.

                       

Jill Gross

Professor Jill I. Gross has been a director of the Investor Rights Clinic (formerly the Securities Arbitration Clinic) since 1999. Professor Gross teaches the Investor Rights Clinic and Seminar, Mediation and Arbitration, and Securities Litigation and Enforcement. She has published numerous law review articles in the area of dispute resolution… MORE >