Schwab clients may now file class-action suits

Schwab clients may now file class-action suits

A recent article in Investment News reports that effective May 15, Charles Schwab Corp. will temporarily modify account agreements to eliminate language that prevents customers from filing class-action lawsuits.

The company said that while it believes dispute resolution is best handled via arbitration, it has chosen to remove the waiver until the issue is resolved by the appropriate regulatory and/or court decisions.

Schwab decided to be proactive because the arbitration decision will likely take considerable time to resolve and may leave clients with a degree of uncertainty until the legal and regulatory process is completed.

Last year, the Financial Industry Regulatory Authority, Inc. (FINRA) brought charges against Schwab, claiming the company’s arbitration agreement violated its rules that ensure customers can join a class-action case instead of arbitration. However, in February, a FINRA hearing panel ruled in Schwab’s favor.

The National Adjudicatory Council (NAC), FINRA’s internal appeals board, received an appeal by FINRA to the Schwab decision, and the case is pending.

Consumer activist group Public Citizen took credit for Schwab’s actions. The group, which is pushing for an end to mandatory arbitration agreements for customers, claimed that Schwab bowed to public pressure created by a petition drive Public Citizen instigated recently.

A. Heath Abshure, Arkansas securities commissioner and president of the North American Securities Administrators Association Inc., says Schwab’s modifications look like a PR move because the company is putting the class-action waivers on hold rather than eliminating them.

Securities regulators are prodding the Securities and Exchange Commission (SEC) to end or reform the use of mandatory arbitration clause, using the authority granted by the Dodd-Frank financial law.

Scott Ilgenfritz — president of the Public Investors Arbitration Bar Association, which represents plaintiffs’ attorneys — claims that the Schwab move is a positive development for Schwab’s customers and the investing public.

The next development related to the Schwab decision is expected to be the result of the appeal by FINRA to the NAC. That hearing is set to begin in September.

Several organizations, including the PIABA, AARP and NASAA have supported FINRA’s appeal by filing amicus briefs with the NAC. In fact State securities regulators recently asked the SEC to overturn the FINRA hearing panel’s decision.

Scott Starr, securities attorney at Starr Austen & Miller endorses the Schwab decision allowing clients to file class-action suits.  “This is definitely a big step in the right direction to act in the best interests of the investors instead of their brokerage house advisors,” he said. “Let’s hope that all good firms follow suit.”