Charles Schwab & Co. v. Fin. Indus. Regulatory Auth. Inc., No. C–12–518 EDL.

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
Writing for the CourtELIZABETH D. LAPORTE
Citation861 F.Supp.2d 1063
PartiesCHARLES SCHWAB & CO. INC., Plaintiff, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY INC., Defendant.
Docket NumberNo. C–12–518 EDL.
Decision Date11 May 2012

861 F.Supp.2d 1063

CHARLES SCHWAB & CO. INC., Plaintiff,
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY INC., Defendant.

No. C–12–518 EDL.

United States District Court,
N.D. California.

May 11, 2012.


[861 F.Supp.2d 1064]


Gilbert Ross Serota, Deborah Splansky Schlosberg, Arnold & Porter LLP, Lowell Harry Haky, Charles Schwab & Co., Inc., Simona Alessandra Agnolucci, Keker & Van Nest LLP, San Francisco, CA, for Plaintiff.

Ethan D. Dettmer, Gibson, Dunn & Crutcher LLP, San Francisco, CA, for Defendant.


ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

ELIZABETH D. LAPORTE, United States Magistrate Judge.

Plaintiff Charles Schwab & Co. seeks a declaratory judgment that Defendant Financial Industry Regulatory Authority (“FINRA”) may not enforce FINRA Rules regulating broker-dealers to bar a new provision in Plaintiff's customer account agreements that waives any right to participation in class action litigation and requires individual arbitration of claims. Plaintiff contends that FINRA Rule 2268(d), properly interpreted, does not prohibit class action waivers and, in the alternative, even if intended to do so, its enforcement would impermissibly violate the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq. Plaintiff seeks injunctive relief barring FINRA from further pursuing discipline proceedings against Plaintiff based on the class action waiver.

Defendant filed a motion to dismiss, arguing primarily that this Court lacks jurisdiction to hear this case. Defendant's motion was fully briefed, and on April 3, 2012, the Court held a hearing on the motion. For the reasons stated at the hearing and in this Order, Defendant's motion to dismiss is granted without leave to amend. The hearing on Plaintiff's Motion for Preliminary Injunction is vacated.

[861 F.Supp.2d 1065]

Background

FINRA was originally incorporated in 1936 as the National Association of Securities Dealers (“NASD”). Compl. ¶ 7; Dettmer Decl. Ex. 5 at 627. In 2007, NASD merged with the regulation and enforcement functions of the New York Stock Exchange (“NYSE”) and was renamed FINRA. Compl. ¶ 7. FINRA is a private, not-for-profit Delaware corporation functioning as a self-regulatory organization (“SRO”) registered with the Securities and Exchange Commission (“SEC”) as a national securities association. Compl. ¶¶ 2, 8; 15 U.S.C. § 78 o–3; Karsner v. Lothian, 532 F.3d 876, 880 (D.C.Cir.2008) (“FINRA, as NASD's successor, is ‘the only officially registered “national securities association” under [the Exchange Act].’ ”) (internal citation omitted). FINRA has regulatory power, delegated from Congress through the SEC in the Securities Exchange Act of 1934 (“Exchange Act”), over broker-dealer firms registered pursuant to section 15 of the Exchange Act and their registered associated persons. Compl. ¶ 10. The Exchange Act gives FINRA the power to propose rules for the conduct and governance of its regulatory functions, and also regulates those rules. Compl. ¶ 11. As an SRO, FINRA is a key part of the interrelated and comprehensive mechanism for regulating securities markets, including market participants such as Plaintiff. See, e.g., Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 (2d Cir.1999) (“As an integral part of a comprehensive system of federal regulation of the securities industry, the NASD regulates the over-the-counter securities market, which includes securities firms and registered representatives who buy and sell over-the-counter-securities.”).

In 1975, Congress amended the Exchange Act to give the SEC a much larger role than it had in the past in supervising FINRA. Compl. ¶ 15. The amendments required FINRA to file proposed rules with the SEC, which then had authority to approve or disapprove all proposed rules after publishing them for public comment, subject to certain exceptions. Compl. ¶ 15; 15 U.S.C. § 78s(b); Credit Suisse First Boston v. Grunwald, 400 F.3d 1119, 1130 (9th Cir.2005) ( “ ‘No proposed rule change shall take effect unless approved by the Commission [,]’ 15 U.S.C. § 78s(b)(1); moreover, the Commission must give public notice of the specific reasons for its approval.”). The SEC may also abrogate, add to and delete from the FINRA rules in any way that it deems appropriate or necessary. Compl. ¶ 15; 15 U.S.C. § 78s(c). FINRA “prescribes rules binding on member firms and their registered representatives for the conduct of securities business” (Compl. ¶ 14), but members can petition the SEC for changes to FINRA's rules. See Ass'n of Inv. Brokers v. SEC, 676 F.2d 857, 864 (D.C.Cir.1982). FINRA has the power to sanction members for noncompliance with securities laws and FINRA Rules, including imposition of fines, censure, and suspension or revocation of membership or registration. Compl. ¶ 14. Because of the SEC's oversight, FINRA Rules approved by the SEC are expressions of federal legislative power and have the force and effect of a federal regulation. Compl. ¶ 16; see also Credit Suisse, 400 F.3d at 1132 (“In sum, we conclude that SRO rules that have been approved by the Commission pursuant to 15 U.S.C. § 78s(b)(2) preempt state law when the two are in conflict, either directly or because the state law stands as an obstacle to the accomplishment of the objectives of Congress. Specifically, we hold that the NASD arbitration procedures in dispute here have preemptive force over conflicting state law.”).

In the early 1970s, Plaintiff joined the NASD, and as part of the application for membership, Plaintiff certified its agreement

[861 F.Supp.2d 1066]

to abide by the Rules of Fair Practice, now FINRA Rules. Dettmer Decl. Ex. 15 at 4, 8, 12; see Fiero v. FINRA, 660 F.3d 569, 571 (2d Cir.2011) (“As a practical matter, all securities firms dealing with the public must be members of FINRA.”). Plaintiff has recertified its agreement to abide by those rules at least ten times since becoming a FINRA member. Id.

FINRA employs a five-stage disciplinary process to regulate broker-dealers. Compl. ¶ 17. First, a FINRA Hearing Panel hears a complaint. Id.;15 U.S.C. § 78 o–3(h)(1); FINRA Rule 9231(b). Second, either side may appeal the Hearing Panel's decision to the FINRA National Adjudicatory Council (“NAC”). Compl. ¶ 17; FINRA Rule 9311(a). Third, at its discretion, the FINRA Board may review the NAC's decision. Compl. ¶ 17; FINRA Rules 9349, 9351. Fourth, a FINRA member or associated person aggrieved by a disciplinary action may apply for review by the SEC. Compl. ¶ 17; 15 U.S.C. § 78s(d); FINRA Rule 9370(a). Fifth, a FINRA member or associated person may appeal an adverse determination by the SEC to a federal circuit court of appeals. Compl. ¶ 17; 15 U.S.C. § 78y(a). Plaintiff alleges that two out of the three members of the FINRA Hearing Panel need not be attorneys, and there is no requirement that any member of the NAC or the FINRA Board be attorneys. Compl. ¶ 18. Plaintiff alleges that there is nothing in the FINRA rules giving members of the Hearing Panel, NAC or FINRA Board the authority to invalidate a FINRA rule. Compl. ¶ 20. Plaintiff notes that this disciplinary process can take many years to complete. See, e.g., PAZ Sec., Inc. v. SEC, 494 F.3d 1059 (D.C.Cir.2007) (disciplinary complaint began on August 14, 2003; appellate court ruled on July 20, 2007).

Plaintiff's account agreement with its customers calls for arbitration before FINRA Dispute Resolution of any disputes arising out of the use of Plaintiff's services. Compl. ¶ 24. In October 2011, Plaintiff amended its account agreement to add a class action waiver:

Waiver of Class Action or Representative Action. Neither you nor Schwab shall be entitled to arbitrate any claims as a class action or representative action, and the arbitrator(s) shall have no authority to consolidate more than one parties' claims or to proceed on a representative or class basis. You and Schwab agree that any actions between us and /or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court. You and Schwab waive any right to participate as a class member, or in any other capacity, in any class action or representative action brought by any other person, entity or agency against Schwab or you.

Compl. ¶ 26 (emphasis in original). This amended agreement was delivered to nearly 7 million existing customers in September 2011 and was included in the Account Agreement for new customers opening accounts on or after October 1, 2011. Compl. ¶¶ 27–28.


On October 20, 2011, FINRA Enforcement Staff notified Plaintiff that it was investigating the new class action waiver. Compl. ¶ 29; Serota Decl. ¶ 4. In response, Plaintiff stated its position that FINRA Rule 2268(d) does not prohibit a class action waiver, and that if it did, it would be unenforceable under Supreme Court authority because it would violate the FAA. See AT & T Mobility v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011); CompuCredit v. Greenwood, ––– U.S. ––––, 132 S.Ct. 665, 181 L.Ed.2d 586 (2012); see also Compl. ¶ 29; Serota Decl.

[861 F.Supp.2d 1067]

¶ 5. In AT & T Mobility, the Court held that the Federal Arbitration Act preempted California law striking down class arbitration waivers in consumer contracts as unconscionable as set forth in Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005). There, the California Supreme Court held that class waivers in consumer arbitration agreements are unconscionable if the waiver is contained in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. The AT & T Mobility Court reasoned: “The overarching purpose of the FAA, evident in the text of §§ 2, 3, and 4, is to ensure the enforcement of arbitration agreements according to their terms so as...

To continue reading

Request your trial
7 practice notes
  • Morgan Stanley v. Babu, Case No.: GJH-19-489
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • March 23, 2020
    ...should have been appealed to the SEC. In support of that argument, he cites to Charles Schwab & Co. v. Fin. Indus. Reg. Auth. Inc. , 861 F. Supp. 2d 1063 (N.D. Cal. 2012) and Morgan Stanley & Co. , Release No. 39459, 1997 WL 802072 (S.E.C. Dec. 17, 1997). Charles Schwab & Co. is of little 4......
  • Scottsdale Capital Advisors Corp. v. Fin. Indus. Regulatory Auth., Case No. 18-cv-2973 (CRC)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • July 16, 2019
    ...that it is ‘fairly discernible’ that Congress intended to preclude district court jurisdiction."); Charles Schwab & Co. v. FINRA, 861 F. Supp. 2d 1063, 1072 (N.D. Cal. 2012) ("The Exchange Act's administrative review process is very similar to the administrative process at issue in Thunder ......
  • Wilbanks Sec., Inc. v. Fin. Indus. Regulatory Auth., Case No. CIV-17-481-R
    • United States
    • United States District Courts. 10th Circuit. Western District of Oklahoma
    • May 10, 2017
    ...Cir. 1985); Merrill Lynch, Pierce, Fenner & Smith v. NASD, 616 F.2d 1363 (5th Cir. 1980); Charles Schwab & Co., Inc. v. FINRA, Inc., 861 F. Supp. 2d 1063 (N.D. Cal. 2012); Pyramid Fin. Corp. v. FINRA, Inc., No. 10-CV-03797-LHK, 2010 U.S. Dist. LEXIS 90543 (N.D. Cal. Aug. 27, 2010); Empire F......
  • Swyers v. U.S. Patent & Trademark Office, Civil No. 1:16-cv-15
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • May 27, 2016
    ...that the Free Enterprise "plaintiffs were not in that scheme at all"); Charles Schwab & Co. Inc. v. Fin. Indus. Regulatory Auth. Inc., 861 F. Supp. 2d 1063, 1078 (N.D. Cal. 2012) ("[I]n Free Enterprise, unlike here, the plaintiff challenged the very existence of the administrative agency, a......
  • Request a trial to view additional results
7 cases
  • Morgan Stanley v. Babu, Case No.: GJH-19-489
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • March 23, 2020
    ...should have been appealed to the SEC. In support of that argument, he cites to Charles Schwab & Co. v. Fin. Indus. Reg. Auth. Inc. , 861 F. Supp. 2d 1063 (N.D. Cal. 2012) and Morgan Stanley & Co. , Release No. 39459, 1997 WL 802072 (S.E.C. Dec. 17, 1997). Charles Schwab & Co. is of little 4......
  • Scottsdale Capital Advisors Corp. v. Fin. Indus. Regulatory Auth., Case No. 18-cv-2973 (CRC)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • July 16, 2019
    ...that it is ‘fairly discernible’ that Congress intended to preclude district court jurisdiction."); Charles Schwab & Co. v. FINRA, 861 F. Supp. 2d 1063, 1072 (N.D. Cal. 2012) ("The Exchange Act's administrative review process is very similar to the administrative process at issue in Thunder ......
  • Wilbanks Sec., Inc. v. Fin. Indus. Regulatory Auth., Case No. CIV-17-481-R
    • United States
    • United States District Courts. 10th Circuit. Western District of Oklahoma
    • May 10, 2017
    ...Cir. 1985); Merrill Lynch, Pierce, Fenner & Smith v. NASD, 616 F.2d 1363 (5th Cir. 1980); Charles Schwab & Co., Inc. v. FINRA, Inc., 861 F. Supp. 2d 1063 (N.D. Cal. 2012); Pyramid Fin. Corp. v. FINRA, Inc., No. 10-CV-03797-LHK, 2010 U.S. Dist. LEXIS 90543 (N.D. Cal. Aug. 27, 2010); Empire F......
  • Swyers v. U.S. Patent & Trademark Office, Civil No. 1:16-cv-15
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
    • May 27, 2016
    ...that the Free Enterprise "plaintiffs were not in that scheme at all"); Charles Schwab & Co. Inc. v. Fin. Indus. Regulatory Auth. Inc., 861 F. Supp. 2d 1063, 1078 (N.D. Cal. 2012) ("[I]n Free Enterprise, unlike here, the plaintiff challenged the very existence of the administrative agency, a......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT