Investor Protection Meets the Federal Arbitration Act

1 Stanford Journal of Complex Litigation (2012 Forthcoming)

U of Cincinnati Public Law Research Paper No. 12-11

49 Pages Posted: 6 Sep 2012 Last revised: 16 Jan 2013

Barbara Black

University of Cincinnati - College of Law

Jill Gross

Pace Law School

Date Written: September 5, 2012

Abstract

In the past three decades, most recently in AT&T Mobility LLC v. Concepcion, the United States Supreme Court has advanced an aggressive pro-arbitration campaign, transforming the Federal Arbitration Act (FAA) into a powerful source of anti-consumer substantive arbitration law. In the aftermath of AT&T Mobility, which upheld a prohibition on class actions in a consumer contract despite state law that refused to enforce such provisions on unconscionability grounds, efforts have been made to prohibit investors from bringing class actions or joining claims, including claims under the Securities Exchange Act of 1934 (the Exchange Act). In the most egregious example to date, the broker-dealer Charles Schwab & Co. (Schwab) revised its customer account agreements to prohibit class actions and joinder of claims. When the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization for broker-dealers, brought a disciplinary action against Schwab, claiming the revision violated FINRA rules, the broker-dealer sued FINRA, asserting that the FAA requires enforcement of its arbitration agreement. This confrontation provides a concrete opportunity to analyze how courts should resolve conflicts between the FAA and federal regulatory statutes designed to protect certain segments of the public, in this case, investors.

This article addresses whether the FAA limits the ability of federal regulators acting pursuant to Congressional authority to impose conditions and limitations on the use of arbitration provisions in order to ensure fairness. In this article, we summarize current Supreme Court FAA jurisprudence that establishes a strong national pro-arbitration policy. We then describe the Exchange Act’s regulation of arbitration involving broker-dealers, specifically the authority delegated to the SEC and FINRA to regulate the content of arbitration clauses in broker-dealer/customer contracts and the Exchange Act’s anti-waiver provision barring any condition that forces investors to waive compliance with any part of the Exchange Act, its rules and SRO rules. After detailing the current regulatory dispute between Schwab and FINRA over Schwab’s inclusion of a class action waiver in its customer agreement, we argue that courts should resolve the conflict between the FAA and the Exchange Act by applying the Exchange Act over the FAA through the long-standing doctrine of implied repeal, additional well-accepted canons of statutory construction, and current Exchange Act and FAA jurisprudence.

Keywords: investor protection, Federal Arbitration Act, Financial Industry Regulatory Authority (FINRA), Securities and Exchange Commission (SEC), securities class actions, implied repeal

JEL Classification: K20, K22, K23, K40

Suggested Citation

Black, Barbara and Gross, Jill, Investor Protection Meets the Federal Arbitration Act (September 5, 2012). 1 Stanford Journal of Complex Litigation (2012 Forthcoming); U of Cincinnati Public Law Research Paper No. 12-11. Available at SSRN: https://ssrn.com/abstract=2141978 or http://dx.doi.org/10.2139/ssrn.2141978

Barbara Black (Contact Author)

University of Cincinnati - College of Law ( email )

P.O. Box 210040
Cincinnati, OH 45221-0040
United States

Jill Gross

Pace Law School ( email )

78 North Broadway
White Plains, NY 10603
United States

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