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This is an update on developments in and implications of
Charles Schwab & Co., Inc.'s (Schwab) litigation with the
Financial Industry Regulatory Authority (FINRA) concerning FINRA
attempt to prohibit financial industry participants from adding
mutual class action waivers into agreements with their
customers.
On May 11, 2012, the Court entered an Order dismissing
Schwab's lawsuit with prejudice. In its ruling, the Court
did not address the merits of Schwab's argument -- that
the Federal Arbitration Act precludes FINRA from sanctioning Schwab
for including class action waivers. The Court did note that FINRA
had commenced a disciplinary action against Schwab regarding its
class action waiver and that FINRA Rules and that either side may
appeal a disciplinary decision through up to two levels of review
within FINRA and subsequently to the United States Securities &
Exchange Commission and the United States Court of Appeals for the
District of Columbia. The Court found that the so-called
"exhaustion" doctrine deprived it of jurisdiction to hear
Schwab's case and that no exception applied. Schwab has
contested FINRA staff's interpretation of the applicable FINRA
rule and takes the position that the rule in question does not in
fact bar class action waivers.
The court's dismissal of the case extends a ruling that
reinforces that FINRA members must "exhaust its administrative
remedies" within FINRA and ultimately with the United States
Securities & Exchange Commission and the United States Court of
Appeals. The Court's decision is not a ruling that FINRA
may prohibit class waivers but instead states only that FINRA
members must go through the FINRA disciplinary process to
determine if their class action waivers are enforceable. If
the Court's ruling becomes final, Schwab may appeal to the
United States Court of Appeals for the Ninth Circuit.
As background, Schwab had filed a declaratory judgment action
against FINRA in the United States District Court for the Northern
District of California on February 1, 2012, a few months after
Schwab inserted a requirement into agreements with its customers
that waives their right to bring an action in litigation or
arbitration as a class action or representative action, and
required that all claims be brought solely in the customer's
individual capacity. The complaint alleged that this
"class action waiver amendment" was made in reliance upon
the U.S. Supreme Court's decision in ATT Mobility v.
Concepcion, which held that the Federal Arbitration Act (FAA)
preempts state laws and judicial opinions that nullify class action
waivers. The Supreme Court extended the rule of ATT
Mobility to claims based upon federal statutes in
Compucredit Corp. v. Greenwood(decided January,
2012). FINRA stated its rules prohibited Schwab from
inserting its class action waiver in the pre-dispute arbitration
agreement with Schwab's customers. Schwab asserted that
the previous NASD Rule had the force of a federal law and its use
by FINRA to prohibit class action waiver provisions ran afoul of
the FAA as interpreted by the US Supreme Court in ATT
Mobility and Compucredit. Schwab sought a
declaration that NASD and FINRA rules could not be enforced to bar
its own class action waiver provision, and an injunction against
FINRA to preclude further enforcement proceedings against
Schwab.
The case is Charles Schwab & Co., Inc. v. Financial
Industry Regulatory Authority, No. 3:12-CV-00518 (N.D. Cal.,
Hon Elizabeth D. LaPorte)
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