The Charles Schwab Corporation
) has received a regulatory approval to disallow its clientele
from bringing class-action lawsuits. The approval was given by a
Financial Industry Regulatory Authority (FINRA) hearing panel,
citing the ban as consistent with the Federal law and the latest
Supreme Court analysis of the Federal Arbitration Act.
It all started last year when Schwab announced that it was
altering nearly 8.8 million account agreements to rule out
class-action lawsuits and enhance its capacity to have more
consolidated arbitration cases. Under class-action lawsuit, small
investors group together to file court cases against a particular
company to recover the losses incurred.
This was in contradiction of the FINRA guidelines. Consequently,
the regulatory body dragged Schwab to court for violating its
The decision to alter the agreements was taken by Schwab
following a $235 million settlement of a class action lawsuit.
Schwab was accused of ambiguous marketing of its high-interest
YieldPlus money-market fund between May 2006 and Mar 2008.
The current ruling will have a profound impact on the entire
industry and is a blow to the FINRA - a private body that
overviews broker-dealer and manages arbitration panels.
However, the hearing panel found that though limiting customer's
class action and arbitration rights is against the FINRA rules,
it is also in conflict with Federal Arbitration Act, and hence
cannot be enforced.
The hearing is very comforting for the brokerage firm as it
maintained that class action lawsuits are disorganized and
expensive for both the parties, whereas arbitration process is
less expensive and more effective way to arrive at a settlement.
Though one panel cannot single-handedly form a law, the decision
will probably influence other brokerage firms - including
TD Ameritrade Holding Corporation
E*TRADE Financial Corporation
Interactive Brokers Group, Inc.
) - to follow similar suit. At present, FINRA is reviewing the
ruling and has not yet appealed against the verdict to its
appellate body - the National Adjudicatory Council.
We believe that the verdict is likely to bring in positive and
far-reaching changes for the brokerage firms. However, for the
consumers this would be a step backwards as it would strip them
of their right to pursue smaller claims.
Schwab currently holds a Zacks Rank #2 (Buy).
TD AMERITRADE (AMTD): Free Stock Analysis
E TRADE FINL CP (ETFC): Free Stock Analysis
INTERACTIVE BRK (IBKR): Free Stock Analysis
SCHWAB(CHAS) (SCHW): Free Stock Analysis
To read this article on Zacks.com click here.