FINRA Hearing Panel States FAA Preempts Rules Permitting Class Action Claims

A Financial Industry Regulatory Authority (FINRA) panel has stated broker-dealer Charles Schwab may enforce a class action waiver included in its customer arbitration agreement despite the existence of a FINRA rule that prohibits such waivers. According to the panel, the FINRA rule is preempted by the Federal Arbitration Act (FAA). In Department of Enforcement v. Charles Schwab & Company, Inc., No. 2011029760201, FINRA’s Enforcement Department sought to discipline Charles Schwab for adding a provision to the company’s arbitration agreement that requires customers to individually arbitrate any disputes that may arise with the company and barred FINRA arbitrators from consolidating those claims. After a California judge refused to hear the case, the matter went before a FINRA hearing panel.

According to the panel, although Charles Schwab’s class action waiver is in violation of FINRA rules permitting customers to bring a class action in court, the FINRA rules do not apply because they are preempted by the FAA. The panel explained,

Supreme Court precedent, however, compels the Hearing Panel to conclude that the FAA bars enforcement of FINRA’s Rules to the extent that the Rules require that customers be given the option to bring their claims in court in the form of judicial class actions despite any pre-dispute agreement to resolve disputes in arbitration. Rules that override an agreement to arbitrate and allow a party to an arbitration agreement to avoid arbitration represent the kind of “hostility” to arbitration that the Supreme Court has repeatedly found inappropriate and unenforceable under the FAA. In Shearson/American Express, Inc. v. McMahon and Rodriguez de Quijas v. Shearson/American Express, Inc., the Supreme Court established that securities law claims are no exception to the FAA’s mandate that a party to an arbitration agreement must go to arbitration to resolve any claim subject to the agreement. In AT&T Mobility LLC v. Concepcion, the Court established that class actions are no exception either, holding that a party to an arbitration agreement has no right to participate in a class action instead of arbitration on an individual basis.

The panel continued by stating despite any overriding policy concerns, there could be no exception to the FAA’s mandate absent clear congressional intent.

In addition, the FINRA panel found that Charles Schwab violated FINRA rules when the company sought to bar FINRA arbitrators from consolidating individual customer claims. Consequently, the hearing panel allowed FINRA to impose sanctions on Charles Schwab based solely on that claim.