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FINRA Reverses Hearing Panel in Schwab Enforcement Case: Class Action Waiver Violates FINRA Rules

by Jill Gross
April 2014

ADR Prof Blog by Andrea Schneider, Michael Moffitt, Sarah Cole,Art Hinshaw, Jill Gross and Cynthia Alkon.

Jill Gross

In a stunning but hoped-for reversal (based on am amicus brief I co-authored in the case), FINRA’s Board of Governors reversed a disciplinary hearing panel decision in the FINRA v Schwab enforcement action. (See some of my previous blog posts on the subject, here, here and here.) That hearing panel had held, among other things, that Schwab’s class action waiver in its standard customer agreement’s pre-dispute arbitration clause violated FINRA rules but those rules could not be enforced under the Federal Arbitration Act.

FINRA reversed that aspect of the hearing panel decision, and held that the Securities Exchange Act constituted a sufficient Congressional command to overcome the FAA’s mandate to courts to enforce arbitration agreements as written. Since the Exchange Act delegated to the SEC, which in turn delegated to FINRA, the authority to regulate broker-dealers’ arbitration agreements for the protection of investors, FINRA’s rules barring class action waivers and mandating that investors be able to bring class claims in court were enforceable.

This is the precise argument I spelled out in my article with Professor Barbara Black, Investor Protection Meets the Federal Arbitration Act, 1 Stan. J. Complex Litig. 1 ­­(2012).

In my view, this is the right result, both under the law and for investors.

Biography


Professor Jill I. Gross has been a director of the Investor Rights Clinic (formerly the Securities Arbitration Clinic) since 1999. Professor Gross teaches the Investor Rights Clinic and Seminar, Mediation and Arbitration, and Securities Litigation and Enforcement. She has published numerous law review articles in the area of dispute resolution and investor justice, and has been quoted in the national media on issues relating to securities arbitration. Professor Gross is a public member of the FINRA National Arbitration and Mediation Committee, and is the program co-chair of PIABA’s annual Securities Law Seminar. As Director of Legal Skills, Professor Gross oversees and provides leadership on all matters related to curricular skills training, including writing programs, advocacy programs, and all clinics, externships, and simulations. Professor Gross previously taught as an adjunct professor at Cornell Law School (Arbitration Law) and at Benjamin N. Cardozo School of Law (Legal Writing). She is an arbitrator for FINRA Dispute Resolution and the National Futures Association. Professor Gross was an attorney in the New York City firms of Kaye Scholer LLP, Morvillo Abramowitz Grand Iason & Silberberg, and Parcher Hayes & Snyder, representing clients in white collar criminal and securities enforcement proceedings, securities arbitrations, and other commercial litigation.



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Website: law.pace.edu/faculty/jill-i-gross

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