More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
A federal judge for the Northern District of California on May 11 dismissed a legal action filed by Charles Schwab against the Financial Industry Regulatory Authority (FINRA) challenging a complaint the regulator levied against Schwab on Feb. 1. That complaint claimed Schwab violated FINRA’s rules by requiring its customers to waive their rights to bring class actions against the firm.
But the judge allowed the issue to move forward through FINRA’s disciplinary process. The ruling on May 11 by U.S. magistrate judge Elizabeth LaPorte “addressed the procedural issue of which forum, FINRA or the federal court, will first hear the dispute,” Schwab spokesman Greg Gable told AdvisorOne.
The ruling, which was a “procedural ruling only,” Gable said, “means that the process will proceed through a series of disciplinary hearings, leading up to a final review by a Federal Circuit Court.” LaPorte’s decision, he said, “did not make any adverse ruling with respect to the merits of Schwab’s position on the case itself. The case will now be heard on its merits by the FINRA disciplinary panel.”
FINRA spokeswoman Nancy Condon declined to comment.
When Schwab filed its countersuit on Feb. 1, the firm said that it believed “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 while seeking a prompt judicial determination of the underlying legal issues."
FINRA’s complaint against Schwab charged that in October 2011, Schwab “amended its customer account agreement to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm.” Schwab sent the amended agreements to nearly 7 million customers, FINRA said.
The Schwab waiver was also sent to clients of registered investment advisors that custody assets with Schwab, Sarah Bulgatz, director of Corporate Public Relations at Charles Schwab, told AdvisorOne at the time FINRA filed its complaint.
The Schwab agreement also included a provision requiring customers to agree that arbitrators would not have the authority to consolidate more than one party’s claims. FINRA’s complaint charged that both provisions violate FINRA rules concerning language or conditions that firms may place in customer agreements.
Schwab’s declaratory judgment action against FINRA, filed on Feb. 1, sought a “court determination that the class-action waiver provisions of the arbitration agreement between Schwab and its customers are enforceable under recent United States Supreme Court decisions interpreting the Federal Arbitration Act and are not barred by any FINRA rule.”
FINRA, Schwab said at the time, “contends that its rules prohibit use of the class-action waiver by brokerage and investment banking firms under its regulatory authority and has stated that it has instituted disciplinary proceedings against Schwab requiring that the class action waiver provision be removed. FINRA claims that its rules are not governed by the Federal Arbitration Act.”