Broker Charles Schwab & Company is seeking to eliminate investors’ ability to pursue class action lawsuits. In the case, Shearson v. McMahon, the U.S. Supreme Court ruled that brokerage firms could force customers to agree to arbitration. Since this ruling in 1987, investors have not been able to use the public court system as a means for recovery. Brokerage firms routinely add a mandatory arbitration agreement to new accounts.
In 2011, Schwab added language to its mandatory arbitration clauses banning clients from participating in class actions. Class actions provide investors the opportunity to join together to litigate claims involving misconduct that led investors to lose money on the same investment. Class actions are often more efficient than hundreds, or even thousands, of individual lawsuits (or arbitrations as the case may be) involving essentially the same facts.
The Financial Industry Regulatory Authority (FINRA) is a quasi-private corporation that regulates the brokerage industry and oversees the arbitration of investor claims. Last year, FINRA filed a disciplinary action against Schwab to force the firm to eliminate its prohibition on class-action suits. Schwab challenged FINRA’s decision and won at a panel hearing in February. FINRA has appealed.
FINRA’s arbitral system is far from a perfect process in itself, as FINRA’s arbitrators are typically sympathetic to the financial industry, are not required to follow the law, and do not usually award punitive damages even in egregious cases. A ruling in favor of Schwab will skew the process even further, as it will encourage other brokerage firms to include similar anti-class provisions in their mandatory arbitration agreements.
This is not a good development for the average investor who, because of the high cost of arbitral fees and securities experts, typically cannot afford to pursue an individual claim in FINRA arbitration. If Schwab is successful and other brokerage firms follow suit, only well-to-do investors will be able to afford to pursue their claims through FINRA arbitration. Beasley Allen is involved in similar force-placed insurance litigation related to hazard, flood, and wind insurance products. If you need more information on this subject, contact Archie Grubb, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Archie.Grubb@beasleyallen.com.
Source: New York Times
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