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Schwab Case Casts Spotlight on Securities Arbitration and Its Flaws

Monday, September, 9, 2013


Regulators have voiced concern over the attempt to block class action lawsuits by the discount brokerage firm, Charles Schwab & Company.  The conflict has brought new attention to the arbitration process for investors, focusing on the flaws in the process that leave groups of investors vulnerable to bad or deceptive investment advice. 


Arbitration is the only dispute resolution process that most investors are allowed to use, due to arbitration clauses in contractual agreements between the investor and the investment firm.  In 1987, the Supreme Court ruled in Shearson v. McMahon that investment companies had the right to include such clauses and compel arbitration.  However, the new restrictions many investment firms are attempting to place on class-action lawsuits have many people concerned that it has gone too far. 


Schwab’s 2011 customer agreement contracts contained a clause barring class-action suits from investors, but the Financial Industry Regulatory Authority (a regulatory private firm) filed a disciplinary action to force Schwab to remove the clause from its customer agreements.  Schwab challenged the action and won that challenge; however, immediately following that win, the Financial Industry Regulatory Authority appealed the case.  Since a ruling hasn’t been finalized, Schwab removed the clause until a decision can been reached by the courts. 


Jill Gross, director of the Investor Rights Clinic at Pace Law School, stated, “The decision in favor of Schwab is backfiring on the industry.” F. Paul Bland Jr., a spokesperson with a nonprofit consumer advocacy group called Public Justice, stated, “The Schwab case is potentially an enormous sea change. If Schwab succeeds, investor protection will be enormously damaged.”


The issue has brought attention to the arbitration process within the securities industry that will likely be ongoing until Schwab’s case is resolved.