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Agency Upholds Investor Enforcement Tools

A financial regulatory organization successfully challenged the ruling by an arbitration panel that rejected the organization’s attempt to enforce its rules – a result AARP had urged.


The Financial Industry Regulatory Authority (FINRA) is a private, self-regulatory organization which under federal law is responsible for protecting investors and the public interest by ensuring that investors have access to redress for claims against securities broker-dealers. Among the actions FINRA is charged with investigating are fraudulent and manipulative acts and practices that imperil investors and matters that pertain to broker-dealer relationships and interactions with their customers. FINRA also presides over an extensive alternative dispute resolution mechanism through its administration of arbitration forums for disputes between broker-dealers and customers. Because FINRA’s rules also prohibit class actions in FINRA arbitration proceedings, the preservation of customers’ rights to proceed via class action in court is an important aspect of safeguarding investors’ rights to comprehensive legal recourse when they are injured by fraudulent practices.

The broker-dealer firm of Charles Schwab and Company challenged an enforcement action by FINRA in which FINRA tried to enforce its rule prohibiting class action waivers in broker-dealer agreements with their customers. Schwab had inserted just such a clause in its customer agreement. Schwab sought to have FINRA’s enforcement action nullified, and the company prevailed in the initial arbitration decision.

Class actions are designed to address widespread fraudulent practices in a single, efficient proceeding. For many people – consumers, investors, etc. – class actions are the only realistic way to challenge actions because these individuals do not have the means to bring individual lawsuits or the individual amounts at stake are so small as not to be able to attract competent counsel (although individual small amounts can aggregate to massive ill-gotten gain for the defendant).

AARP Foundation Litigation attorneys filed AARP’s friend-of-the court brief in the matter pointing out that the letter and intent of the legislation establishing FINRA was to permit it to formulate and enforce rules to police broker-dealer conduct, and the brief noted that without class actions the overall mission of FINRA is thwarted. “An individual investor who has lost her meager life’s saving may simply give up when confronted with the prospect of facing a large brokerage firm, represented by a team of top Wall Street lawyers, in order to recover her losses,” argued the brief. Additionally, the brief pointed out, class actions protect investors by deterring bad practices. The threat of a class action lifts a lawsuit from a mere “nuisance” to a real threat, and thus a broker-dealer is more likely to take care to ensure bad practices are corrected in order to avoid such litigation.

What’s at Stake

Americans rely upon broker-dealers for sound management of investment assets to sustain them through their retirement. The changing retirement paradigm – shifting more responsibility for retirement funds to individual investors – increase the need for individuals to have as many tools at their disposal as possible to vindicate their rights. Moreover, this changing paradigm points up the need for strong tools such as class actions to deter possible misconduct before it even starts.  

Case Status

In re Matter of Department of Enforcement v. Charles Schwab and Co., was settled following a customer-favorable decision in the administrative appellate proceedings at FINRA. Under the terms of the settlement, Schwab agreed to pay a $500,000 fine and to cease all use of terms barring class actions in the company’s customer agreements.