The Financial Industry Regulatory Authority last week found Charles Schwab in violation of FINRA rules when it attempted to keep investors from participating in judicial class actions by adding waiver language to customer account agreements.

The ruling by FINRA's Board of Governors affirms in part and reverses in part an earlier FINRA hearing panel decision, which found that Schwab's waiver violated FINRA rules that limit the language that firms may place in pre-dispute arbitration agreements. The hearing panel also concluded, however, that FINRA could not enforce those rules because they were in conflict with the Federal Arbitration Act (FAA).

In October 2011, Schwab sent amendments to its customer account agreement to more than 6.8 million investors. The amendments included waiver provisions that required customers to agree that any claims against Schwab be arbitrated solely on an individual basis and that arbitrators had no authority to consolidate more than one party's claims.

In the latest ruling, the Board overturned hearing panel's finding and determined that the FAA does not preclude FINRA's enforcement of its rules. In addition, the Board upheld the hearing panel's determination that Schwab's attempt to prevent FINRA arbitrators from consolidating more than one party's claims in a FINRA arbitration forum violated FINRA rules.

The Board decision would have remanded the case to the hearing panel for a determination of appropriate sanctions, but Schwab instead agreed to a $500,000 fine to resolve the matter. Schwab also agreed to notify all its customers that the class-action waiver requirement has been withdrawn from its customer account agreements and is no longer in effect.

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