This is an update on developments in and implications of Charles Schwab & Co., Inc.'s (Schwab) litigation with the Financial Industry Regulatory Authority (FINRA) concerning FINRA attempt to prohibit financial industry participants from adding mutual class action waivers into agreements with their customers.

On May 11, 2012, the Court entered an Order dismissing Schwab's lawsuit with prejudice.  In its ruling, the Court did not address the merits of Schwab's argument  -- that the Federal Arbitration Act precludes FINRA from sanctioning Schwab for including class action waivers. The Court did note that FINRA had commenced a disciplinary action against Schwab regarding its class action waiver and that FINRA Rules and that either side may appeal a disciplinary decision through up to two levels of review within FINRA and subsequently to the United States Securities & Exchange Commission and the United States Court of Appeals for the District of Columbia.  The Court found that the so-called "exhaustion" doctrine deprived it of jurisdiction to hear Schwab's case and that no exception applied.  Schwab has contested FINRA staff's interpretation of the applicable FINRA rule and takes the position that the rule in question does not in fact bar class action waivers. 

The court's dismissal of the case extends a ruling that reinforces that FINRA members must "exhaust its administrative remedies" within FINRA and ultimately with the United States Securities & Exchange Commission and the United States Court of Appeals.  The Court's decision is not a ruling that FINRA may prohibit class waivers but instead states only that FINRA members must go through the FINRA  disciplinary process to determine if their class action waivers are enforceable.  If the Court's ruling becomes final, Schwab may appeal to the United States Court of Appeals for the Ninth Circuit.

As background, Schwab had filed a declaratory judgment action against FINRA in the United States District Court for the Northern District of California on February 1, 2012, a few months after Schwab inserted a requirement into agreements with its customers that waives their right to bring an action in litigation or arbitration as a class action or representative action, and required that all claims be brought solely in the customer's individual capacity.  The complaint alleged that this "class action waiver amendment" was made in reliance upon the U.S. Supreme Court's decision in ATT Mobility v. Concepcion, which held that the Federal Arbitration Act (FAA) preempts state laws and judicial opinions that nullify class action waivers.  The Supreme Court extended the rule of ATT Mobility to claims based upon federal statutes in Compucredit Corp. v. Greenwood (decided January, 2012).  FINRA stated its rules prohibited Schwab from inserting its class action waiver in the pre-dispute arbitration agreement with Schwab's customers.  Schwab asserted that the previous NASD Rule had the force of a federal law and its use by FINRA to prohibit class action waiver provisions ran afoul of the FAA as interpreted by the US Supreme Court in ATT Mobility and Compucredit.  Schwab sought a declaration that NASD and FINRA rules could not be enforced to bar its own class action waiver provision, and an injunction against FINRA to preclude further enforcement proceedings against Schwab. 

The case is Charles Schwab & Co., Inc. v. Financial Industry Regulatory Authority, No. 3:12-CV-00518 (N.D. Cal., Hon Elizabeth D. LaPorte)

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