On April 24, 2014, FINRA’s board of governors found that Congress, through the Securities Exchange Act, gave registered securities associations such as FINRA the responsibility to regulate the brokerage industry, subject to oversight by the Securities & Exchange Commission. (Click here to a see a copy of the decision.) This delegated power to regulate includes the power to regulate how broker dealers resolve disputes with its customers. As a result, FINRA’s arbitration rules, which ban class action waivers, have the force of federal law, and thus the Federal Arbitration Act does not preempt these FINRA arbitration rules. In effect, investors can bring class proceedings against broker dealers, and class waivers in investors’ arbitration agreements are not enforceable under FINRA’s rules.
The FINRA board distinguished the Supreme Court’s Concepcion decision because Concepcion involved a California state law banning class waivers, and here, FINRA’s rules instead have the effect of federal law. As a part of its decision, the FINRA board found that Charles Schwab & Co. had violated FINRA rules by incorporating class waivers in its arbitration agreements. Charles Schwab entered into a settlement with FINRA, agreeing to pay a $500,000 fine and notify its customers that the class waivers in their arbitration agreements are no longer enforceable.