Charles Schwab has given up – at least for the moment – on forcing its customers to waive their right to a class action lawsuit in case of a dispute. While it’s hand was forced by the Financial Industry Regulatory Authority (FINRA), Schwab could have retained the class action ban in its securities agreements until its dispute with FINRA is fully resolved.
As reported by The Wall Street Journal, FINRA brought a compliant against Schwab early last year, alleging that the the class action ban was against FINRA rules. FINRA rules prohibit the use of class action waivers by brokerages and investment banking firms and requires firms to only require arbitration of individual claims.
In February, part of the FINRA complaint against Schwab was dismissed as the FINRA panel hearing the dispute said that it couldn’t stop Schwab from forcing its customers to waive those rights. FINRA has appealed that decision.
Then came the Schwab decision to modify its customer agreements to remove the class-action ban beginning May 15 and “in the foreseeable future.” Of course, if they ultimately win they are likely to reinstate the class action ban — a company spokesperson said, “We have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decision.”
Regardless of the outcome of this dispute, it’s clear that the binding arbitration system in securities dispute needs to be throughly examined and eventually discarded by the federal Securities and Exchange Commission (SEC).
FINRA is the administrator and a major stakeholder in the current binding arbitration system, which requires customers of brokerage and investment banking firms to arbitrate disputes rather than take them to court. I’ve written about binding arbitration, which is biased against consumers, unfair and serves to abrogate the right of investors to access the U.S. justice system in a post entitled SEC should end mandatory arbitration clauses in brokerage contracts.
According to the consumer rights group Public Citizen, more than 7 million Schwab customers have been affected by the class action ban. In a letter urging new SEC Chairwoman Mary Jo White to take up the subject of either banning or modifying the use of arbitration in brokerage contracts, Public Citizen and 14 other organizations, including AARP, Consumer’s Union and the Consumer Federation of America, notes that “The 2008 financial crisis, the effects of which the country continues to wrestle with five years later, should be enough to motivate the Commission to restore investors’ legal rights.
“Brokerage firms were responsible for many fraudulent actions that led to or arose from the financial crisis. Indeed, the Commission identified Schwab as one of the firms that misled investors and ‘concealed the extent of risky mortgage-related and other investments in mutual funds and other financial products.’ Ensuring that investors can choose the forum in which to resolve disputes with broker-dealers and investment advisors is critical to both to remedying those past abuses and deterring future misconduct.”