On February 1, 2012, the Financial Industry Regulatory Authority (FINRA) announced that it had filed a complaint against Charles Schwab & Company. FINRA charged the firm with violating FINRA rules when it required the waiving of rights of customers to bring class actions against the firm. It is the belief of many investment attorneys, investors and others in the securities industry that investors should retain the right to file class actions against the firm in the event that broker misconduct occurs.
According to the complaint issued by FINRA, Charles Schwab is charged with amending its customer agreement in October 2011 to include a provision that required customers to waive their rights that allowed them to bring or participate in class actions against the firm. The amended agreements were sent to nearly 7 million customers.
Furthermore, the agreement included a provision that required customers to agree that, in arbitration proceedings, arbitrators would not be able to consolidate the claims of multiple parties. According to FINRA, both provisions are in violation of FINRA rules of language or conditions that may be placed in customer agreements by firms.
Because Charles Schwab’s conduct is ongoing, FINRA is seeking an expedited hearing. Since October 2011, the account agreements that contain these provisions have continued to be in use by the firm in opening over 50,000 customer accounts.
According to the FINRA press release, “The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings in the complaint have not been made, and does not represent a decision.”
Charles Schwab will have the opportunity to file a response and request a FINRA disciplinary panel hearing. Possible remedies for this complaint include payment of restitution, disgorgement of associated gains, censure, fine and suspension or bar from the securities industry. Charles Schwab investors should keep a close eye on developments relating to this complaint because it could make a significant impact on their rights related to securities arbitration.