FINRA: Schwab's Waivers Are Against the Rules.

Today, FINRA filed a disciplinary complaint against Charles Schwab & Co. for changes made to its customer account agreements. In October 2011, Schwab amended its agreements to include a Waiver of Class Action or Representative Action provision, requiring its nearly 7 million customers waive any right to participate in class actions against Schwab – whether through arbitration or in court:

Neither you nor Schwab shall be entitled to arbitrate any claims as a class action or representative action, and the arbitrator(s) shall have no authority to consolidate more than one parties' [sic] claims or to proceed on a representative or class action basis. You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court. You and Schwab waive any right to participate as a class member or in any other capacity, in any class action or representative action brought by any other person, entity or agency against Schwab or you.

The Waiver also seeks to remove arbitrator authority to consolidate similar claims – a power specifically granted them under FINRA's Rules.

FINRA alleges that these provisions violate several Rules, including those which expressly allow for participation in class actions and forbid member firms from including any provision in a customer provision that would limit these types of claims.

In the disciplinary complaint. FINRA not only seeks to stop Schwab from continuing to violate its Rules but also is seeking that sanctions be imposed.

In response, Schwab filed a declaratory judgment action against FINRA in federal court. Schwab asked the U.S. District Court for the Northern District of California for a "determination that the class action waiver provisions of the arbitration agreement between Schwab and its customers are enforceable under recent United States Supreme Court decisions interpreting the Federal Arbitration Act and are not barred by any FINRA rule."

The recent Supreme Court decision they are reffering to AT&T Mobility v. Concepcion, 584 F. 3d 849, in which the United States Supreme Court held that California's Discover Bank Rule (a line of case law in which the state of California had refused to enforce certain class action arbitration waivers as "unconscionable") was preempted by the Federal Arbitration Act (a Federal Statute protecting arbitration agreements).

The full disciplinary complaint can be found here.

A link to Schwab's declaratory judgment is availableherehere.