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Schwab Wins Arbitration Approval

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New York, NYIt might seem odd for the Financial Industry Regulatory Authority (FINRA) to fight against a clause requiring FINRA arbitration over lawsuits in any disputes, but that is exactly what FINRA has done. The organization lost its initial bid against Charles Schwab, who moved to have its customers agree to arbitration over a lawsuit when disputes arise. Although FINRA’s argument was heard by one of its own panels, the panel found in favor of Schwab.

According to the ruling, issued by a Financial Industry Regulatory Authority panel, Charles Schwab’s move to ban class-action lawsuits is in line with federal law. In 2011, Charles Schwab modified customer account agreements to prohibit class-action lawsuits. The company also moved to change how arbitration cases are consolidated. FINRA argued Schwab’s move violated FINRA’s own regulations by limiting clients’ rights to file a lawsuit.

The hearing panel agreed that FINRA’s rules were being violated, according to Reuters (2/21/13), but found that FINRA’s rules are in conflict with the Federal Arbitration Act. The panel’s decision could pave the way for other financial firms to revise their customer agreements. FINRA has since decided to appeal the decision, which now sits with the National Adjudicatory Council.

In 2010, Schwab settled a class-action lawsuit alleging misleading marketing of one of its funds. That lawsuit was reportedly settled for $235 million. In the recent hearing, the FINRA panel fined Schwab $500,000 for its attempt to bar arbitrators from consolidating individual claims. The panel found Schwab had no such right.

Many financial firms have client agreements that require customers to go through arbitration to settle a dispute. There are some concerns that by requiring arbitration, rather than allowing a lawsuit to be filed, customer rights are being severely limited.

In February 2013, William Galvin, chief securities regulator in Massachusetts, sent a letter to the Securities and Exchange Commission, asking them to examine mandatory arbitration clauses. Galvin argued that the clauses are inconsistent with the fiduciary duty investment advisors owe their clients and noted that Section 921 of the Dodd-Frank Act gives the SEC the authority to ban arbitration clauses if the clauses are not in the interests of the public.

By requiring arbitration to settle a dispute, before the nature of any potential dispute is known, clients’ rights are limited.

Although there are some benefits to FINRA arbitration - including reportedly shorter hearings than in court and binding decisions - there have been concerns raised that FINRA arbitration panels favor financial firms and businesses over individual investors.


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