The Securities and Exchange Commission (SEC) has approved a rule that effectively precludes securities firms from demanding that their employees sign arbitration agreements that waive the right to participate in “collective actions” under federal worker-protection statutes. The rule was proposed by the Financial Industry Regulatory Agency, Inc. (FINRA), the industry self-regulatory authority that governs the conduct of securities firms. On April 13, the SEC published a Federal Register notice approving the rule and accelerating its effective date to May 4, 2012 (while also allowing further public comments on a provision that has been changed from what FINRA initially proposed).
FINRA rules have long provided that arbitration agreements between securities firms and their customers and employees must permit participation in class actions in court. FINRA’s rules provide that class actions can’t be arbitrated and that any matter that is the subject of a class action pending in a court must stay in court. But confusion arose when a federal district court held that these rules didn’t apply to “collective actions” under the Fair Labor Standards Act, the Age Discrimination in Employment Act, and the Equal Pay Act, which differ from class actions—mainly in that plaintiffs have to opt in to a collective action, unlike a class action, where class members are part of the case unless they opt out.
FINRA’s rule change is designed to protect employees’ ability to proceed in a collective action in court in the same way that securities firms’ customers can participate in class actions against securities firms. (One caveat is in order: The new FINRA rule only prohibits securities firms from using FINRA-sponsored arbitration to prevent employees from participating in collective actions. After first proposing a broader rule, FINRA amended the rule to provide that it doesn’t affect whether a securities firm can require its employees to engage in non-FINRA arbitration and include collective-action waivers in such non-FINRA arbitration agreements.)
While the new rule is a victory for opponents of the use of arbitration agreements to choke off class actions and other types of collective proceedings, FINRA’s longstanding protection of the right of investors to pursue class actions against securities firms in court rather than being relegated to individual arbitration is under attack by the brokerage firm Charles Schwab & Co. Schwab sued FINRA in the U.S. District Court for the Northern District of California in February, arguing that the longstanding rule precluding enforcement of class-action bans in FINRA arbitration agreements violates the Federal Arbitration Act. Schwab has moved for a preliminary injunction; FINRA has moved to dismiss and to stay the motion for a preliminary injunction. A motions hearing is currently scheduled for May 24.
A win for Schwab would roll back protection for investors and also call into question FINRA’s new rule extending that protection to employees of securities firms who seek to recover full compensation for their work under federal law. See also Brian's recent post on academic support for the notion that the Federal Arbitration Act as construed in Concepcion should override SEC protections for class actions in the securities world.