## Facts

- Charles Schwab & Company, Inc., a FINRA member broker-dealer, used customer account agreements containing predispute arbitration clauses.
- In October 2011, Schwab sent amendments to more than 6.8 million customers that added a “Waiver of Class Action or Representative Action.”
- The waiver required customers to give up the right to bring or participate in judicial class actions or representative actions against Schwab.
- The waiver also sought to prevent FINRA arbitrators from consolidating claims, requiring disputes to proceed only on an individual (bilateral) basis.
- FINRA Enforcement investigated and filed a disciplinary complaint in February 2012 alleging the waiver conflicted with FINRA/NASD rules governing arbitration provisions and customer rights, including FINRA Rules 2268 and 2010, NASD Rule 3110, and FINRA Arbitration Rules 12204 and 12312.
- A FINRA Hearing Panel, on summary disposition, found the consolidation restriction violated FINRA/NASD rules, but concluded the class-action waiver rules could not be enforced because the Federal Arbitration Act (FAA), as interpreted in *AT&T Mobility LLC v. Concepcion*, foreclosed enforcement.
- Both sides appealed; FINRA’s Board of Governors reviewed and issued the operative decision on April 24, 2014.
- After the Board decision and a remand for sanctions, Schwab settled by paying a $500,000 fine and notifying customers that the class-action waiver language was withdrawn and no longer in effect.

## Issues

1. Whether FINRA/NASD rules preserve customers’ ability to bring or participate in judicial class actions notwithstanding a member firm’s predispute arbitration agreement language to the contrary.
2. Whether FINRA/NASD rules preserve arbitrators’ authority to consolidate claims in FINRA arbitration notwithstanding contractual provisions barring consolidation.
3. Whether the FAA preempts FINRA’s enforcement of its rules restricting class-action waivers and consolidation waivers in member firms’ customer arbitration agreements.

## Decision

- The FINRA Board of Governors affirmed in part and reversed in part the Hearing Panel’s decision, and remanded for sanctions (later resolved by settlement).
- The Board held Schwab violated FINRA/NASD rules by including language that barred customers from bringing or participating in judicial class actions.
- The Board rejected the Hearing Panel’s FAA-preemption rationale and held the FAA did not preclude FINRA from enforcing rules preserving access to judicial class actions.
- The Board agreed Schwab violated FINRA rules by attempting to bar arbitrator consolidation of claims in FINRA arbitration.
- The Board concluded the rule violations also constituted violations of FINRA Rule 2010.

## Legal Principles

- FINRA member firms must draft predispute arbitration agreements consistent with FINRA/NASD rules governing permissible contract terms and customer dispute-resolution rights.
- FINRA Arbitration Rule 12204 bars class actions in the FINRA forum and prohibits members from requiring customers to waive participation in judicial class actions; contract terms contradicting that protection violate FINRA Rule 2268’s restrictions on predispute arbitration clauses.
- Contract terms that remove or restrict arbitrators’ rule-based authority (including consolidation authority under FINRA Arbitration Rule 12312) impermissibly limit or contradict FINRA forum rules and violate FINRA Rule 2268 and related NASD requirements.
- The FAA does not bar FINRA, acting within its SRO regulatory authority, from enforcing SEC-approved rules that define permissible arbitration-clause content for member firms and preserve judicial class actions as an alternative mechanism.
- Violations of FINRA/NASD rules governing customer agreements and forum procedures may also constitute a violation of FINRA Rule 2010’s requirement to observe just and equitable principles of trade.

## Conclusion

FINRA’s Board of Governors determined that Schwab’s customer agreement amendments unlawfully sought to eliminate judicial class actions and restrict arbitrator consolidation contrary to FINRA/NASD rules, and it held that the FAA did not prevent FINRA from disciplining a member firm for using such prohibited waiver provisions.


Dep’t of Enf’t v. Charles Schwab & Co., FINRA No. 2011029760201 (FINRA Bd. of Governors 2014)