Schwab Lawsuit Restrictions Lifted Amid Debate Over Class Action Ban

As legal challenges continue over Charles Schwabs requirement that clients waive their right to file class action lawsuits, the brokerage firm has decided to temporarily lift the lawsuit restriction. 

Until last week, a controversial provision in Charles Schwab account agreements waived a client’s ability to participate in class action litigation if a dispute arises over the handling of their account, requiring any legal disagreements go through arbitration.

However, in a statement issued last week, Charles Schwab indicates that it is modifying the agreements to eliminate the class action lawsuit waiver for events that occur on or after May 15, 2013. While the company indicates that the change will apply to events for the “foreseeable future,” they have indicated that the waiver is only being removed until the validity of the waiver is resolved by the appropriate regulatory agency or court.

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The announcement comes as the Financial Industry Regulatory Authority (FINRA) continues to challenge Schwab’s right to stop clients from bringing class action lawsuits.

FINRA is an independent regulator for all securities firms doing business in the United States, providing arbitration services for claims against stock brokers and serving to protect investors by making sure the securities industry operates fairly and honestly. The organization oversees about 4,275 brokerage firms, about 161,495 branch offices and more than 630,000 securities representatives.

Earlier this year, a hearing was held after FINRA brought three counts against Charles Schwab over the changes originally made last year to customer agreements. The revision affected more than 8.8 million Schwab customers at the time. While a panel of arbitrators determined that the Schwab customer agreements violate FINRA rules, it concluded that FINRA is unable to enforce those rules due to a conflict with the Federal Arbitration Act (FAA), thus upholding the use of the agreement.

FINRA is appealing the ruling to the National Adjudicatory Council.

According to the recent statement released by Schab, the company indicates that it still believes that dispute resolution is best handled through FINRA arbitration, rather than pursuing class action lawsuits, Schwab indicates that it is voluntarily removing the waiver to avoid uncertainty for clients.

“While the company believes that dispute resolution is best handled via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions,” the Schwab statement reads. “Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.”

Schwab modified their customer agreements after paying more than $100 million to settle class action lawsuits over misleading marketing materials associated with their YieldPlus funds, which were ultra-short bond funds sold as conservative investment alternatives to money market funds. The lawsuits were filed after the fund lost more than 30% of its value between June 2007 and June 2008, resulting in huge losses for investors who claimed that Schwab failed to adequately disclose the nature of the risks.


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