April 24, 2014

Schwab Backs Down on Class-Action Ban

Statement by Christine Hines, Consumer and Civil Justice Counsel, Public Citizen

Note: In 2013, a FINRA (Financial Industry Regulatory Authority) hearing panel ruled in favor of Charles Schwab, permitting it to maintain its class-action ban and citing the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion. (The case essentially permitted corporations to insert class-action bans in pre-dispute forced arbitration clauses buried in consumer and employment contracts.) FINRA appealed the hearing panel’s decision to another panel in the organization. FINRA’s Board of Governors today issued a decision finding that Schwab had violated FINRA rules. The board also announced a settlement with Schwab.

In a major win for investors, Charles Schwab has agreed in a settlement with the industry regulatory body FINRA to refrain from adding language to its investor contracts that prohibit its customers from participating in class actions. Schwab had added the class-action ban to a provision in the contract terms that forces customers to resolve disputes in arbitration.

Charles Schwab’s decision to settle with FINRA and eliminate the class-action ban was a smart move and the right decision to protect investors. This change will permit them to exercise their right to seek accountability for financial harm caused by widespread misconduct. We hope this settlement will deter other brokerage firms from adding class-action bans to their customer contracts.

Although Schwab has agreed to eliminate the class-action ban, individual investors should still have a choice in how they resolve disputes. Many brokerage firms and investment advisers include terms in their customer contracts that require investors to resolve disputes in the private arbitration process rather than court. That’s why the Securities and Exchange Commission (SEC) should exercise its authority granted by the Dodd-Frank law and issue a rule to eliminate pre-dispute forced arbitration clauses from investor contracts with brokers and investment advisers.

Almost a year ago, Charles Schwab bowed to public pressure after a public firestorm over its class-action ban, removing the unfair provision from its customer contracts while it continued its dispute with FINRA over the legality of its new terms.

Public Citizen played a huge part in creating that public anger, launching a petition signed by more than 15,000 people in under 24 hours, and joining with other organizations and lawmakers in calling for an SEC rule to ban arbitration clauses in broker-dealer contracts and investment adviser contracts. Today was a win for consumers and investors.

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