* Brokerage industry seen split on adopting class-action ban
* Regulator slams Schwab's restrictions on small clients
* Rivals may see opportunity in not following suit
By Jed Horowitz
NEW YORK, Feb 26 Charles Schwab Corp
will likely seek dismissal of pending class actions after a
regulator on Thursday upheld its right to bar clients from
bringing such lawsuits, the company said.
"It is possible we can now move to dismiss those cases that
are class actions based on this FINRA ruling," Greg Gable, a
Schwab spokesman, wrote in an email, referring to the Financial
Industry Regulatory Authority. He said he did not know if Schwab
will also try applying the decision retroactively to cases that
have already been settled or decided.
Any attempt to leverage its victory, however, could further
inflame criticism from consumer advocates, state regulators and
class-action lawyers about Schwab's move to limit clients'
Rival broker-dealers would not comment for the record, but
the securities industry appears split on the issue of
restricting clients' dispute options.
Many firms are likely to follow Schwab, industry lawyers
said. But some may urge their brokers to woo clients away from
the San Francisco-based firm by highlighting a policy some view
as hurting the individual investor Schwab has long championed,
said two sources at large brokerages who were not authorized to
A FINRA hearing panel last week upheld Schwab's late 2011
move to require clients to waive their class-action rights.
Schwab's requirement violates FINRA's rules, but the rules
themselves violate the National Arbitration Act, the panel
FINRA, the security industry's self-regulator, told Reuters
on Tuesday that it will appeal the ruling.
Schwab is litigating two class actions filed after the ban
was imposed in late 2011 in its client account agreements. The
cases, consolidated in San Francisco County Superior Court,
allege that Schwab recorded confidential phone conversations
without client consent, in violation of California law. They
seek $5,000 for each alleged violation against the firm's
approximately 9 million client accounts.
Massachusetts Commonwealth Secretary William Galvin on
Tuesday called on Schwab to repudiate the class-action ban. It
is likely to be adopted industrywide, he said in statement,
giving "every rogue broker-dealer the green light to steal from
their customers in small-dollar amounts."
Clients who prevail in class actions usually receive bits of
large settlements for small claims that do not justify the costs
of hiring lawyers to represent them in a FINRA arbitration.
"If the broker-dealer has harmed a large group of people,
they cannot combine their resources to go against the larger
corporate entity," said Christine Hines, consumer and civil
justice counsel at Public Citizen, a Washington-based
consumer advocacy group. "It's just another way for the
corporate entity to escape accountability for any wrongdoing or
harm that they cause."
Some lawyers at brokerage firms who insisted on anonymity
said direct Schwab rivals such as TD Ameritrade Holdings
and E*Trade Financial are likely to follow its
move to ban customer class actions while some very large rivals
may keep the status quo. Almost all broker-dealers require
clients to bring individual disputes to FINRA arbitration but do
not ban class suits. Spokespersons at the brokerage firms
declined to comment.
Public relations experts said the Schwab decision may
provide an opening for rivals who do not impose class-action
"If I were the competition I'd seize on this as a great
opportunity to articulate a willingness to entertain complaints
of small investors," said Mark Arena, founder of The PR Verdict,
a website that grades firms on their public relations responses.
"Given where we are in the economic cycle and the perception
that small investors continue to be bullied around by the
interests of Wall Street, this might not be the best time" to
follow Schwab. Arena was formerly a public relations executive
with UBS AG's U.S. operations.
Schwab maintains that class actions take longer to
adjudicate and are more expensive than an arbitration proceeding
for both parties, a claim Massachusetts' Galvin on Thursday
"We believe the evidence is overwhelming that investors -
large and small - are better served through arbitration than
class actions, where the plaintiff's lawyers reap the lion's
share of settlements," Gable said in response to Galvin.