Published on:

Citing Concepcion, FINRA Panel OKs Class Action Waivers in Broker-Dealer Customer Arbitration Agreements

Written by:  Jessica R. Bogo

A Financial Industry Regulatory Authority (“FINRA”) hearing panel held that FINRA’s own rules prohibiting judicial class action waivers in broker-dealer customer arbitration agreements are preempted by the Federal Arbitration Act and unenforceable. Once this decision becomes final, it will likely change the landscape of broker-dealer arbitrations. Many other broker-dealers will adopt a judicial class action waiver in their customer arbitration agreements and end decades of securities class action lawsuits, which generally provide little benefit to class members.

In a thoughtful 48-page decision, a FINRA hearing panel on Thursday, February 21, 2013 followed the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) (“Concepcion”) and held that FINRA Rules prohibiting broker-dealers from adopting judicial class-action waivers in customer arbitration agreements are unenforceable and preempted by the Federal Arbitration Act (“FAA”). For more background on Concepcion and recent California litigation post-Concepcion, please see our prior client alerts including, “Recent Maverick Ruling in CA Appellate Court Finds Concepcion Does Not Overrule Gentry.”

The decision arises from a Complaint filed on February 1, 2012 by FINRA’s Department of Enforcement against Charles Schwab & Co., Inc. (“Schwab”). In September 2011, Schwab added a provision to its pre- dispute arbitration agreements requiring customers to “waive any right to bring a class action, or any type of representative action” against Schwab or any related third party “in court.” The Complaint alleged that the waiver violated FINRA’s Rules prohibiting self-regulatory organizations (“SROs”) from adopting pre-dispute arbitration agreements that prohibited customers from filing judicial class actions.