Brief Argues FINRA Not Preempted, Brokerage Firms Cannot Ban Class Actions
Public Justice has just partnered with the AARP and the National Consumer Law Center (NCLC) on a brief challenging Charles Schwab’s position that the Federal Arbitration Act (FAA) preempts Financial Industry Regulatory Authority (FINRA) rules.
In October 2011, Schwab mailed out amendments to its investor agreement banning class actions — even though Schwab, as a FINRA member firm, long ago agreed to abide by FINRA rules that preserve judicial class actions.
Public Justice’s brief explains that the FAA simply does not extend to cases involving the right of a self-regulatory organization like FINRA to contractually oblige its own members to follow FINRA rules as a condition of FINRA membership. If brokerage firms like Schwab are able to ban class actions, the brief argues, investors will have no remedy for broker fraud unless their claims are economically viable on an individual basis — but many aren’t.
“If the self-regulatory system is expected to protect investors,” wrote Public Justice’s Executive Director Arthur Bryant in an e-mail, “Schwab must not be permitted to exempt itself from one of the most — if not the most — significant mechanisms that FINRA has for holding brokerage firms accountable for misconduct: the class action.“
Previously, Schwab convinced a FINRA arbitration panel that FINRA’s rules preserving class actions are preempted by the FAA pursuant to AT&T Mobility v. Concepcion. That decision is now on appeal to the National Adjudicatory Council, the appellate body that reviews FINRA arbitration decisions. Public Justice’s brief strongly urges the Council to hold that the FAA does not prevent FINRA from requiring its own members to abide by its own rules regarding the preservation of judicial class actions.
