The Financial Industry Regulatory Authority (FINRA) has decided
to appeal to its appellate body - the National Adjudicatory Council
- against The Charles Schwab Corporation ( SCHW ). The decision
comes after a FINRA hearing panel approved Schwab's demand to ban
class-action lawsuits.TD AMERITRADE (AMTD): Free Stock Analysis
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ReportSCHWAB(CHAS) (SCHW): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment
The hearing panel had approved the ban citing it as consistent
with the Federal law and the latest Supreme Court analysis of the
Federal Arbitration Act. Also, the 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.
Schwab succeeded in getting the approval for the ban, but on the
other hand the hearing panel disallowed its demand to block
arbitrators from uniting individual arbitration claims into group
hearings. Moreover, the panel penalized Schwab $500,000 for
including the group ban in its client contracts. This was a partial
win for FINRA.
It all started last year with Schwab revising its customer
agreements to incorporate a class-action waiver condition requiring
that all disagreements between the brokerage firm and its clientele
be arbitrated. This was in contradiction of the FINRA
The ruling will profoundly influence the entire industry and is a
blow to the FINRA. Schwab is likely to seek dismissal of pending
class-action lawsuits. Other brokerage firms, including TD
Ameritrade Holding Corporation ( AMTD ),
E*TRADE Financial Corporation ( ETFC ) and
Interactive Brokers Group, Inc. ( IBKR ), may also
follow similar suit.
If other brokerage firms start following the suit, it would raise
severe investor protection concerns. It is likely to prevent
consumers from following class-action litigation due to inability
of FINRA's dispute-resolution forum to handle these types of cases.
Moreover, it would strip customers of their right to pursue smaller
We believe that FINRA's action to appeal against the ban of
class-action lawsuit is well justified and is totally in the
interest of the consumers.
Schwab carries a Zacks Rank #2 (Buy).