More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The Financial Industry Regulatory Authority’s Board on Thursday found that Charles Schwab & Co. violated FINRA rules when the firm attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.
The ruling affirms in part and reverses in part an earlier FINRA Hearing Panel decision, in which the panel found that Schwab’s waiver violated FINRA rules that limit the language that firms may place in pre-dispute arbitration agreements but concluded that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA).
The Board, FINRA said, overturned this finding and determined that the FAA does not preclude FINRA’s enforcement of its rules.
In addition, the Board upheld the Hearing Panel’s determination that Schwab’s attempt to prevent FINRA arbitrators from consolidating more than one party’s claims in a FINRA arbitration forum violated FINRA rules.
As FINRA explains, the Board decision would have remanded the case to the Hearing Panel for a determination of appropriate sanctions.
However, Schwab instead entered into a settlement, agreeing to pay a fine of $500,000 and to notify all of its customers that the class action waiver requirement has been withdrawn from its customer account agreements and is no longer in effect. “This fully resolves the matter,” FINRA said.
Schwab said in a statement that it is “pleased to resolve this dispute with FINRA, and to put to rest any client concerns on this issue. Over the last year, we heard clearly that a number of our clients and members of the general public have strong feelings about maintaining access to class action lawsuits. In a business like ours where our reputation and public trust are key to our success, we take perspectives like those very seriously.”
The Schwab statement said the company has “agreed with FINRA to remove the waiver from our account agreements, rather than seeking further legal appeals on the matter,” stating this “is in our clients’ and the company’s best interest.”
Schwab went on to say that the company “initially made the decision to require individual arbitration of disputes based on principled reasoning and careful analysis of how to provide clients with the best means of dispute resolution. We believed, and still believe, that FINRA arbitration is the best means for investors to resolve disputes with their brokerage firm, but we will maintain their access to class-action lawsuits should they prefer that option.”
In October 2011, Schwab sent amendments to its customer account agreement to more than 6.8 million investors. The amendments included waiver provisions that required customers to agree that any claims against Schwab be arbitrated solely on an individual basis and that arbitrators had no authority to consolidate more than one party's claims.
The North American Securities Administrators Association filed an amicus brief last May in support of FINRA. Former NASAA President Heath Abshure said at the time that “Charles Schwab’s attempt to unilaterally alter its account agreements to include the class-action waiver is an obvious attempt by the firm to insulate itself from liability to its own clients.”
NASAA said Thursday that Schwab’s decision to include class action waivers in the arbitration provisions of its customer contracts "is yet another example of the harmful effects of mandatory arbitration clauses and heightens the need to pass the Investor Choice Act (H.R. 2998)" introduced by Rep. Keith Ellison, D-Minn.
The legislation, which NASAA said now has 29 cosponsors, "would end the use of mandatory pre-dispute agreements by broker-dealers and investment advisors, and would guarantee class-action participation." These agreements, "especially when coupled with class-action waivers, effectively eliminate any reasonable chance for retail investors with small-dollar claims to have their claims heard in an unbiased and fair forum,” NASAA said.
FINRA’s Board of Governors may call for review and issue a decision involving a matter before the National Adjudicatory Council as was done in Schwab’s case. In February 2013, a FINRA Hearing Panel dismissed two of three causes from a February 2012 FINRA complaint. FINRA and Schwab both appealed this decision to the NAC in February 2013.