Schwab client-waiver spurs FINRA complaint

Wed Feb 1, 2012 7:37pm EST
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By Joseph A. Giannone and Suzanne Barlyn

(Reuters) - Wall Street's own watchdog filed a complaint against Charles Schwab Corp (SCHW.N: Quote) on Wednesday accusing the online brokerage of requiring customers to waive their rights to pursue class actions against the firm, a violation of industry rules.

The Financial Industry Regulatory Authority alleged that San Francisco-based Schwab added a new provision in October to more than 6.8 million customer account agreements that would preclude them from starting or joining class-action lawsuits against the brokerage, according to FINRA's complaint.

Schwab also required customers to agree that industry arbitrators would not have the authority to consolidate claims from multiple parties. These types of consolidated cases are common, but typically include far fewer claimants than those in a class action court cases.

FINRA, in addition to being Wall Street's regulator, runs the arbitration forum where customers and brokerage firms typically must resolve legal disputes. FINRA arbitration rules do not allow arbitrators to hear class action cases.

The rules also restrict brokerages from limiting investors' rights to file cases in court in situations that arbitration rules allow, such as in class actions.

Schwab's agreement would effectively leave investors in a bind, in which many would not have access to a legal process for recovering their losses, say lawyers.

Investors with larger claims, say $1 million, could have an economic incentive to pursue their claims in an individual arbitration case, said Steven Caruso, a securities arbitration lawyer for Maddox Hargett & Caruso in New York. But many investors with small damages, who often join together in court class action cases, would effectively have no remedy, he said.

"If you can't get the class, it's not economical to bring an arbitration, so you don't do anything," Caruso said. Schwab "was trying to get the best of both worlds," he said.   Continued...