InvestmentNews (May 19, 2013  11:01 pm) -- The Charles Schwab Corp. has dropped language from its client arbitration contracts that prevents customers from filing class actions — at least until the policy can be litigated.

Critics welcomed the news but said they won't be satisfied until the controversial provision is gone for good.

In a statement released last Wednesday, Schwab said that it would no longer force clients to a give up their right to join class action suits against the firm in disputes related to events on or after May 15.

“While the company believes that dispute resolution is best handled via ... arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions,” the company said. “Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.”

Finra brought charges against Schwab last year, claiming that the company's arbitration agreement violated its rules ensuring that customers can join a court-filed class action instead of arbitration. But a Finra hearing panel in February ruled in Schwab's favor, saying that the Federal Arbitration Act of 1925 prevented Finra from enforcing those rules.

Finra appealed the decision to its internal appeals board, the National Adjudicatory Council, where the case is pending and expected to be heard in September.

With the waiver that it inserted into its client contracts, Schwab was a trailblazer on how to handle class actions, according to Douglas Schriner, president of FA Risk Management Inc.

But even though Schwab has stepped back from its original position, other firms will wait to see how the NAC rules before making any adjustments to their own contracts.

“We don't know how the NAC's going to view this,” Mr. Schriner said.

Organizations such as the North American Securities Administrators Association Inc. that have been pushing to end mandatory-arbitration clauses in client contracts took a skeptical view of Schwab's action.

The modification “looks like a PR move,” said A. Heath Abshure, Arkansas' securities commissioner and NASAA president.

State securities regulators have pushed the Securities and Exchange Commission to use the authority granted by the Dodd-Frank financial reform law to end or reform the use of mandatory-arbitration clauses.

“We've still got a long way to go, and we're not going to stop with our effort just because this happened,” Mr. Abshure said in reference to Schwab's decision.

Schwab spokesman Greg Gable declined to respond directly to Mr. Abshure's comments.

“Our statement speaks for itself,” Mr. Gable said.

In an e-mail, Finra spokeswoman Michelle Ong declined to comment, citing the pending litigation.

Schwab's move is “a positive development for the investing public and certainly for Schwab customers,” said Scott Ilgenfritz, president of the Public Investors Arbitration Bar Association, which represents plaintiff's attorneys.

But “we'll have to wait and see what happens with the appeal” by Finra to the NAC, said Mr. Ilgenfritz, who also is a partner at Johnson Pope Bokor Ruppel & Burns LLP.

The AARP, PIABA and NASAA have supported Finra's appeal by filing amicus briefs with the NAC.

State securities regulators also recently wrote to the SEC to ask the commission to overturn the Finra hearing panel's decision.

“Hopefully, the public pressure Schwab has received will [keep] other [brokerage] firms” from using similar class action waivers, Public Citizen spokeswoman Christine Hines said.

Public Citizen, a consumer activist group that is pushing for an end to mandatory-arbitration agreements, took credit for Schwab's action last week.

In a statement, the group said that Schwab was “bowing to public pressure” created by a petition drive Public Citizen instigated three weeks ago.