November 28, 2017

The Bureau of Consumer Financial Protection Class Action Waiver Rule Overturn Has No Effect on FINRA Members

Sandra D. Grannum – November 28, 2017

A new rule from the Consumer Financial Protection Bureau (CFPB) intended to prevent class action waivers in arbitration provisions for contracts covering certain consumer financial products has come and gone in less than two months.

On July 10, 2017, the CFPB issued its new final rule, 12 CFR Part 1040, which was published in the Federal Register on July 19, 2017, and went into effect on September 18, 2017. The rule provided that the pre-dispute arbitration clauses for credit cards and banks cannot contain class action waivers.  However, by October 26, 2017, the rule was overturned by Congress in a 50/51 vote with Vice President Pence breaking the tie.  While this has been touted by the Wall Street Journal as the financial industry’s “most significant legislative victory since President Donald Trump took office”, it in fact has no effect on the status of class actions against FINRA members.

If it was not obvious before, in 2014, FINRA’s stance on members including class action waivers in arbitration provisions was made crystal clear. Charles Schwab included a class action waiver in its 2011 revision to its customer agreements, which resulted in a FINRA regulatory proceeding. It was determined that Charles Schwab’s class action waiver violated FINRA rules. FINRA also determined that, as the self-regulatory organization, its enforcement of its rules did not conflict with the Federal Arbitration Act (FAA). Charles Schwab ultimately entered into an Acceptance Waiver and Consent, wherein it agreed to pay a $500,000 fine, and removed the class action waiver from its customer agreements. Although the CFPB describes this rule as covering “providers of certain consumer financial products and services,” this rule does not affect FINRA members, as the CFPB recognizes that FINRA and the SEC have been actively regulating arbitrations in the FINRA forum.

Even the now defunct rule noted the availability of class actions against FINRA members specifically stating that “[u]nder FINRA’s Code of Arbitration for customer disputes, FINRA members have been prohibited since 1992 from enforcing an arbitration agreement against any member of a certified or putative class unless and until the class treatment is denied (or a certified class is decertified) or the class member has opted out of the class or class relief.” In addition:

The Bureau also notes that claims in FINRA arbitration between customers and broker-dealers are filed with FINRA, which is overseen by the SEC, and all awards between customers and broker-dealers under FINRA rules must be made public. Proposed comment 3(b)(1)-1 would clarify that § 1040.3(b)(1)’s reference to rules authorized by the SEC would include those promulgated by FINRA and approved by the SEC, as described above, in order that products and services covered by those FINRA rules would be excluded from the coverage of proposed Part 1040.

Consequently, FINRA arbitration was excluded from the coverage of the CFPB’s short lived rule.  Notwithstanding the financial industry’s “most significant legislative victory” that victory does not reach FINRA members.

Sandra D. Grannum is a partner with Drinker Biddle in the firm's Florham Park, New York, office.


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Sandra D. Grannum – November 28, 2017