By Jed Horowitz
May 16 Charles Schwab Corp has
temporarily reversed its requirement that clients waive their
right to bring class-action lawsuits, adding a new twist in a
battle closely watched by the securities industry and
"Effective immediately, Schwab is modifying its account
agreements to eliminate the existing class-action lawsuit waiver
for disputes related to events occurring on or after May 15,
2013 and for the foreseeable future," the San Francisco-based
brokerage company said in a statement that was posted on its
website on Wednesday.
Schwab still believes that arbitration is the best forum for
clients to resolve disputes with the firm, but said it was
backing off the litigation ban in deference to clients who are
uncertain about their rights as it fights to defend its original
Schwab's right to stop clients from bringing coordinated
court actions was challenged last year by the Financial Industry
Regulatory Authority, the securities industry's principal
regulator. A FINRA hearing panel in February ruled that Schwab's
policy does violate FINRA rules but was consistent with federal
law and recent Supreme Court interpretations of the Federal
FINRA is appealing the decision to the National Adjudicatory
Council, its in-house appellate body.
"Given that the process will likely take considerable time
to resolve, and may leave clients with a degree of uncertainty
about their dispute resolution options in the meantime, we have
elected to remove that uncertainty until the legal and
regulatory process is completed," Schwab wrote in its statement.
Consumer advocates, along with class-action lawyers, have
blasted Schwab's efforts to limit the lawsuits, saying many
ordinary investors cannot afford to pay on their own for the
cost of arbitration hearings.
In its statement, Schwab noted it will continue to pay
arbitration fees for any investor who pursues an arbitration
claim under $25,000 against the company.
Public Citizen, a consumer watchdog group that has been
circulating a petition asking Schwab to rescind the class-action
ban, congratulated the company for its "responsible" decision.
It said many of its 19,000 supporters who signed the petition
also are Schwab customers who spoke directly to the firm.
Schwab last year asked its almost 9 million clients to sign
new account agreements that agreed to waive their class-action
rights. The revised policy followed settlements of such suits in
which the firm agreed to pay $235 million for misleading
marketing of its YieldPlus money-market fund between May 2006
and March 2008.
Several U.S. legislators led by Senator Al Franken of
Minnesota last month urged the Securities and Exchange
Commission to prevent all broker-dealers from mandating that
clients bring disputes only through arbitration forums.
Separately, more than 90 percent of shareholder votes
tallied at Schwab's annual meeting on Thursday were cast in
favor of reelecting founder Charles Schwab and three other
directors who were running unopposed for board seats.
At the same time, almost one-third favored a shareholder
proposal that would allow them to directly nominate board
candidates and a second that would require Schwab to disclose
its political contributions. The company opposed both proposals.
In answer to a shareholder question about raising its
dividend, Schwab said he was "optimistic" that as earnings
improve "in the next year or so," the company's board will
consider a dividend increase.
Despite relatively lackluster earnings amid rock-bottom
interest rates in recent years, Schwab has been paying out about
30 percent of its net income to shareholders through dividends,
Chief Financial Officer Joe Martinetto said that for the
second straight year, client trading is proving weaker than
Schwab had expected and will likely be up only "modestly" from
last year's low trading volume. But he and Chief Executive Walt
Bettinger said that by cutting expenses and continuing to
attract record amounts of new assets from clients, the company's
profit margin and stock price remains solid.
"We are widening our lead over our competitors," Bettinger
said, adding that the $112 billion of net new assets collected
from clients last year was up 30 percent, outpacing the growth
at Merrill Lynch, Morgan Stanley, TD Ameritrade
Holding Corp and E*Trade Financial Corp.
While Schwab was created 40 years ago to appeal to
self-directed clients who did not want advice from brokers,
Schwab is earning increasingly high fees for providing advice
today while trading commissions are declining. About 13 percent
of clients assets at Schwab are being held in cash, which
Bettinger called a "historically" high level, but more than 70
percent of new clients are enrolling in advice-related programs,
Shares of Schwab, which are up 31.7 percent since the
beginning of the year, fell 7 cents or 0.4 percent to close at
$18.91 in trading Thursday on the New York Stock Exchange.