According to Reuters, the judge of the U.S. District Court for the Northern District of California has dismissed the lawsuit filed by The Charles Schwab Corporation (SCHW) against the Financial Industry Regulatory Authority (FINRA) in February 2012. The lawsuit followed the enforcement case filed by FINRA against Schwab.
In October 2011, Schwab included a new provision in the agreements of more than 6.8 million customer accounts, prohibiting them from initiating or joining class-action lawsuits against the brokerage firm. Under class-actions, small investors join together to file court cases against the company to recuperate the losses incurred.
Further, Schwab also asked for customers’ consent to evade industry arbitrators from their authority to consolidate claimants against the company and file a case.
FINRA, the major non-governmental regulator for securities firms, executes financial regulation of member brokerage firms and exchange markets. It legalizes trading in equities, corporate bonds, securities futures, and options. Moreover, it also operates the prime arbitration forum in the United States for resolving disputes between member firms and customers, as well as between brokerage firm employees and their firms.
Therefore, FINRA, to inculcate major protection issues of investors and hold its position as a regulator, filed a disciplinary case against Schwab alleging that the company is trying to safeguard itself by preventing customers from suing it in class actions. Such provisions in Schwab's agreement would stop the investors from filing case against the firm to recover their losses.
Although Schwab argued that the process gets delayed while adhering with the procedures of FINRA, it did not really help the company.
Magistrate Judge Elizabeth Laporte has ordered FINRA to pursue further proceedings over its disciplinary case against the brokerage firm. However, it is unclear to investors whether Schwab will go along with FINRA or violate the rule by including such provision in its agreements with customers.
Such disputes dent the financials and reputation of the firms. This in turn, results in loss of valuable clients in the ongoing competitive markets. Moreover, existing investors’ confidence gets shattered by such moves.
Shares of Schwab currently retain a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, Schwab’s peer- E*TRADE Financial Corporation (ETFC) retains a Zacks #3 Rank (a short-term ‘Hold’ rating).
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