A Financial Industry Regulatory Authority (FINRA) Hearing Panel recently ruled that a national broker-dealer can enforce the class action waiver in its customer arbitration agreements because the FINRA rule prohibiting such waivers is preempted by the Federal Arbitration Act (FAA).

The company’s victory potentially opens the door for all broker-dealers to use class action waivers in their arbitration agreements with customers. It also might enable companies to include in their constituent documents arbitration agreements with class action waivers.

FINRA’s enforcement department sought to discipline the company because FINRA arbitration rules permit customers to bring class actions in court if they do not wish to arbitrate individual claims. The company initially sought to block FINRA’s enforcement action in court, but the suit was dismissed by a California federal judge because the company had not exhausted its administrative remedies.

Although the Hearing Panel found that the class action waiver violated FINRA rules, it concluded that under AT&T Mobility v. Concepcion and subsequent U.S. Supreme Court decisions, “the FAA cannot be overridden by other policy makers. Only Congress can create an exception to the FAA.” 

The Hearing Panel concluded that Congress created no FAA exception that would bar arbitration of the company’s customer claims or require the availability of judicial class actions. On the contrary, the Panel found, the Supreme Court has previously held that securities claims are subject to arbitration. According to the Hearing Panel, the SEC’s approval of the FINRA rule preserving judicial class actions as an option was “not the same as a congressional command creating an exception to the FAA.” 

The Panel’s ruling comes only days before the U.S. Supreme Court argument in Italian Colors Restaurant v. American Express Travel Related Services Co. In that case, the U.S. Court of Appeals for the Second Circuit held that there is a “vindication of federal rights” exception to Concepcion. The court also rejected American Express’ argument that the class action waiver in its credit card arbitration provision should be enforced because Congress did not except federal antitrust claims from the FAA. The argument rejected by the Second Circuit is essentially the same argument credited by the FINRA Hearing Panel.

On Wednesday, March 20, 2013, Ballard Spahr will host a webinar from 12 p.m. to 1 p.m. ET on the implications of the FINRA Hearing Panel’s opinion.

Attorneys in Ballard Spahr’s Securities Litigation Group regularly represent broker-dealers and have in-depth knowledge of FINRA and other financial arbitration forums. The firm’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

Copyright © 2013 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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