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By CYRIL TUOHY, managing editor of Risk & Insurance®

A federal court next month is expected to rule on a dispute over whether investors can bring class-action lawsuits against brokerage firms. The dispute pits the securities industry-funded Financial Industry Regulatory Authority against Charles Schwab & Co., the San Francisco-based discount brokerage giant.

When investors open brokerage accounts, they are required to refrain from seeking redress in the courts, resorting instead to arbitration proceedings run by Finra, which does not have arbitration procedures for class-action claims, the Wall Street Journal reported.

Gilbert Serota, the lawyer representing Schwab, told the Journal that the federal law would take precedence over Finra rules. If Schwab should prevail, some legal experts believe it would set a precedent and brokerage firms would follow Schwab and insert their own waivers to customer agreements.

In the eyes of Finra, Schwab's move is a blatant attempt to limit clients' rights and lock investors out of their ability to seek remedy, and plaintiff's lawyers also see the move as an evisceration of the rights afforded retail investors.

Finra, filed suit in February against Schwab charging the brokerage firm with violating the rules governing the conditions brokerage firms may place in customer agreements.

"Schwab's Class Action Waiver limits and contradicts the provisions of Rule 12204 by requiring customers to waive the right to bring or participate in any manner in any aspect of a class action against Schwab," wrote Thomas B. Lawson, vice president and chief counsel for Finra's Department of Enforcement.

In response, Schwab last week filed a federal court action asking the U.S. District Court for the Northern District of California to declare its class action waiver provisions are enforceable under federal law and recent decisions by the U.S. Supreme Court, according to court documents and a written statement from the company, Reuters reported.

Since last October, Schwab sent amended agreements to 6.8 million customers, and amended agreements were also included in 50,000 new accounts signed up by Schwab since October, Finra said.

Investors filed about 4,700 cases with Finra last year, down 17 percent from 2010, and in 2011, arbitration awarded damages to customers in about 44 percent of cases, according to Finra statistics cited by the Journal.

The Schwab case may prompt some corporate directors and officers to inquire more deeply into the insurance program -- if they are not already doing so.

According to the 2011 Directors and Officers Liability Survey released earlier this month by Towers Watson, 25 percent of public companies and 14 percent of private/nonprofit respondents indicated that they increased the total limits of liability in their D&O program at renewal.

A total of 69 percent of respondents made an inquiry in 2011 about the amount and scope of coverage, compared with 57 percent in 2010.

March 27, 2012

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