Law360, New York (May 09, 2013 5:16 PM) -- State regulators and investor organizations Wednesday joined the Financial Industry Regulatory Authority in its appeal against a FINRA panel decision to allow Charles Schwab Corp. to prevent clients from filing class actions.
The regulators and investor organizations argued in a series of briefs that the panel exceeded its authority and greatly endangered the ability of clients to file claims.

The panel wrongfully dismissed disciplinary complaints against Schwab, giving the broker the green light to require clients to sign class action waivers before entering arbitration, according to a friend of the court brief filed with FINRA's National Adjudicatory Council. FINRA, which initiated the complaints, faulted its panel's decision and filed an appeal Feb. 26 with the NAC, a committee that reviews decisions from FINRA disciplinary proceedings.

The North American Securities Administrators Association Inc. contended in its brief that the panel overstepped its authority by flouting agency rules and “erroneous[ly]” applying the Federal Arbitration Act, which the panel found to support Schwab's use of the waiver. NASAA and other organizations filed the briefs Wednesday in support of FINRA's appeal of the panel's ruling. The briefs argued that Schwab's ability to block class actions harms investors by effectively silencing clients whose claims are outweighed by the cost of pursuing the litigation.    

“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,” Heath Abshure, NASAA president and Arkansas securities commissioner, said in a statement. “This ruling would essentially allow broker-dealers to prohibit participation in class actions against them by their customers. That’s wrong on the merits and bad public policy.”

A Schwab spokeswoman Thursday told Law360 that the company supports “fair, efficient and cost-effective” resolutions to client disputes. She did not offer comments about the briefs.

“FINRA Dispute Resolution provides investors the best, most productive option for resolving brokerage account disputes and is available for disputes of even the smallest claims,” Sarah Bulgatz, spokeswoman for Charles Schwab, told Law360 in an email. “There is ample evidence that class action litigation is unduly expensive and time-consuming for all parties and typically results in resolutions benefiting class action lawyers rather than their clients.”

FINRA initiated controversy over Schwab's so-called pre-dispute arbitration agreement when it filed a complaint in February 2012, prompted by a provision in the agreement requiring all of its customers' disputes to be worked out through arbitration rather than class actions.

FINRA rules don't allow investment banks and brokers to implement such waivers. The panel, however, invoked the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion that supported the broker's right to force customers to sign away their ability to initiate class actions.

The panel found that, although Schwab’s class action waiver requirement violates FINRA rules, the regulator’s rules cannot be enforced because Federal Arbitration Act rules preempt them. The high court’s Concepcion decision determined that parties in an arbitration agreement do not have the right to take part in class actions instead.

Friday's briefs argued that the panel had only the authority to review whether Schwab's agreement met FINRA regulations, not if the agreement was permitted under the FAA. The panel was obligated to enforce FINRA rules against the waiver, but its FAA compliance is a “fact-based inquiry for the courts to decide,” according to NASAA's brief.

“The hearing panel never should have reached the question of FAA enforceability of the Schwab Customer Agreement,” NASAA said in its brief. “However, insofar as it did consider that question, it erred by declaring a one-size-fits-all approach to the enforceability of class action waivers in [pre-dispute arbitration agreement].”

The Public Investors Arbitration Bar Association; and jointly the AARP, the National Consumer Law Center and Public Justice filed similar briefs Wednesday.

NASAA is represented by Joseph Opron III, assistant general counsel for NASAA.

Counsel information for Charles Schwab was not immediately available.

The case is Department of Enforcement v. Charles Schwab & Co. Inc., disciplinary proceeding number 2011029760201, in the Financial Industry Regulatory Authority.

--Additional reporting by Beth Winegarner. Editing by Melissa Tinklepaugh.