By Jed Horowitz
NEW YORK, Feb 21 (Reuters)bb - Charles Schwab Corp.
can ban its clients from bringing class-action lawsuits, a
securities industry regulatory panel ruled Thursday in a
sweeping decision that is likely to influence other U.S.
brokerage firms to follow Schwab's policy.
Schwab last year told customers it was modifying their 8.8
million account agreements to prohibit class-action suits and to
modify their ability to have arbitration cases consolidated. The
decision followed settlements of class-action litigation by
Schwab in which it agreed to pay $235 million for misleading
marketing of its high-interest YieldPlus money-market fund
between May 2006 and March 2008.
A Financial Industry Regulatory Authority hearing panel said
in a 48-page ruling that the class-action ban is consistent with
federal law and recent Supreme Court interpretations of the
Federal Arbitration Act.
The ruling by the industry panel is a blow to FINRA, a
private group that regulates broker-dealers and administers
arbitration panels. It is also a setback for class-action
lawyers.
Last February, FINRA's enforcement department charged Schwab
with violating its rules by limiting clients' class-action and
arbitration rights. The hearing panel on Thursday agreed that
the class-action ban violates the self-regulator's rules but
found that the rules are not enforceable because they conflict
with the Federal Arbitration Act.
"Schwab is pleased with the panel's decision," the San
Francisco-based firm said in a statement. "The company believes
customers are better served through the existing FINRA
arbitration process and that class-action lawsuits are a
cumbersome and less effective means of resolving disputes - for
both parties."
A FINRA spokeswoman said the group was reviewing the
decision, and could not yet comment on whether it would appeal
the ruling to its appellate body, the National Adjudicatory
Council.
Securities industry executives view arbitration hearings as
quicker and less expensive than courtroom battles, and said it
is likely many firms will now attempt to revise their customer
account agreements.
"FINRA could appeal, but you have a fairly well-developed
decision here," said Kevin Carroll, associate general counsel of
the Securities Industry and Financial Markets Associations,
broker-dealers' main trade group. "It's up to our individual
members to determine if they will adopt a class-action ban."
Plaintiffs' lawyers said an appeal is almost certain and
will be in the best interests of brokerage firm clients.
"It's a significant step backwards for consumers," said Ryan
K. Bakhtiari, a partner at Aidikoff, Uhl & Bakhtiari in Beverly
Hills, California, and past president of the Public Investors
Arbitration Bar Association. "I would expect FINRA to move to
protect its turf."
Scott Ilgenfritz, his successor as president of the
plaintiff lawyers' trade group, said he is bracing for a wave of
changes in brokerage contracts. "You'll see every major
broker-dealer and some of the independent contractor shops
putting these in. Why wouldn't they?" said Ilgenfritz, a
partner at Johnson, Pope Bokor, Ruppel & Burns in Tampa,
Florida.
Some lawyers said it is far from certain that a single
hearing panel can determine far-reaching law. "This ruling
threatens most securities class-actions, but the panel does not
usually make the law," said John Coffee, a securities law
professor at Columbia Law School.
In spite of the ruling, FINRA can tell broker-dealers that
if they want to remain members they still have to abide by its
"fair-play" rules that include access to the courts, he said.
The Securities and Exchange Commission, which delegates
regulatory authority over brokers to FINRA, requires all
broker-dealers to be members and all brokers who sell securities
to be licensed by FINRA.
FINRA prevailed in one of its three actions against Schwab.
The panel said Schwab violated FINRA rules by limiting the
powers of its arbitrators to consolidate individual client
claims in hearings.
The federal arbitration law does not dictate how arbitration
forums should be run, the panel ruled, and fined Schwab
$500,000. It also ordered the broker to take corrective action
and remove the violative language from its customer agreements.
Schwab removed the language from client accounts in January,
a Schwab spokesman said.
The company, he added, is pleased that it prevailed "on the
central class-action waiver issue."
(Additional reporting by Suzanne Barlyn)
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