Today's Trends in Credit Regulation

Zeroing in on Class Action Waivers in Mandatory Binding Consumer Arbitration Agreements
By Elizabeth Yen

As widely reported in both industry and general news publications, the Consumer Financial Protection Bureau is considering restricting or prohibiting class action waivers in mandatory pre-dispute arbitration clauses contained in certain consumer credit contracts, pursuant to its statutory authority under 12 USC Section 5518. There is interesting precedent for this in the securities and health care industries.

The securities industry has for decades prohibited class action waivers in customers' mandatory pre-dispute binding arbitration agreements. More specifically, Rule 12204 of the Financial Industry Regulatory Authority, Inc. (FINRA) prohibits class arbitrations and also prohibits enforcement of a pre-dispute mandatory binding arbitration agreement against a potential member of a court-certified class action until the motion for class action certification is denied, or the class is decertified, or the customer who will be participating in the arbitration is excluded from or opts out of participation in the class action. In an April 24, 2014 decision by FINRA's Board of Governors (copy available at, FINRA ruled that Charles Schwab & Company, Inc. ("Schwab") violated FINRA rules by adding class action waivers to its pre-dispute mandatory binding arbitration customer agreements in 2011. Notably, FINRA's Board of Governors stated that the Federal Arbitration Act did not override FINRA's prohibition against class arbitrations and against class action waivers, because of specific provisions in the Securities Exchange Act that grant FINRA a high degree of regulatory authority over securities broker-dealers. (See, e.g., 15 USC Sections 78o-3 and 78s.[1]) The Securities and Exchange Commission approved FINRA's rule prohibiting class arbitrations and requiring customers' class claims to be heard in court, pursuant to 15 USC Section 78s(b) (setting forth the process FINRA must follow to obtain SEC approval for proposed rules and proposed changes to existing rules).[2] 15 USC Section 78o(o) also specifically allows the SEC to "prohibit, or impose conditions or limitations on the use of, agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute between them arising under the Federal securities laws, the rules and regulations thereunder, or the rules of a self-regulatory organization if it finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of investors."

FINRA determined that the Securities Exchange Act includes statutory provisions that override the general provisions of the Federal Arbitration Act (including provisions of the FAA that generally defer to the mutual agreement of the parties concerning the scope of an arbitration clause). To settle this matter with FINRA, Schwab agreed to pay a $500,000 fine and to notify its affected customers that the class action waiver in their arbitration agreements "has been withdrawn and is no longer in force and effect." (See April 16, 2014 Letter of Acceptance, Waiver and Consent, copy available at More recently, FINRA proposed "crowdfunding" rules that would incorporate FINRA's existing class action waiver prohibition, and the SEC published a request for public comment on this proposal.[3]

In April 2015 the U.S. Department of Labor (DOL) published a proposed rule that would allow broker-dealers and insurance agents providing investment advice to employee benefit plans and individual retirement accounts to receive compensation from third parties under certain conditions, including (inter alia) the requirement that the investor not waive or qualify the investor's "right to bring or participate in a class action or other representative action in court in a dispute" with the investment adviser or the adviser's employer or another entity that has retained the adviser.[4] DOL noted that "[t]he right of a Retirement Investor to bring a class-action claim in court (and the corresponding limitation on fiduciaries' ability to mandate class-action arbitration) is consistent with FINRA's position that its arbitral forum is not the correct venue for class-action claims." The North American Securities Administrators Association, Inc.[5] and certain other public commenters, including AARP,[6] have asked the DOL to completely prohibit pre-dispute binding arbitration agreements in the context of broker-dealers and investment advisors who provide employee retirement plan investment advice, pursuant to the specific statutory authority granted to the SEC in 15 USC Section 78o(o). Not surprisingly, other public commenters, including the U.S. Chamber of Commerce,[7] argue that federal law (including the Federal Arbitration Act) does not allow DOL to restrict the terms of arbitration agreements used in connection with employee retirement plans.

In the health care field, the Centers for Medicare and Medicaid Services (CMS) are presently considering regulations that would restrict the ability of long-term care facilities that accept Medicare or Medicaid reimbursement to include mandatory binding arbitration provisions in their admissions contracts. (See 80 Fed. Reg. 42168 (July 16, 2015).) Under proposed 42 CFR Section 483.70(n), an arbitration agreement may be entered into voluntarily by a long-term care facility resident after it has been explained to the resident, but admission and readmission to, and continuing residency at, the facility may not be made contingent on the resident entering into a mandatory binding arbitration agreement. To facilitate this, CMS would require binding arbitration agreements to be separate from other agreements and documents used by long-term care facilities that concern non-arbitration matters.

CMS also requested public comment on whether long-term care facilities should be prohibited from entering into binding arbitration agreements with residents. Numerous state attorneys general sent a joint comment letter to CMS in October 2015[8] supporting a prohibition against pre-dispute mandatory binding arbitration provisions in long-term care facility admissions contracts. Their comment letter notes that the American Arbitration Association adopted a policy in 2003 to "not administer healthcare arbitrations between individual patients and healthcare service providers that relate to medical services, such as negligence and medical malpractice disputes, unless all parties agreed to submit the matter to arbitration after the dispute arose." (emphasis in original) Counsel for the U.S. Chamber of Commerce and the U.S. Chamber Institute for Legal Reform submitted a comment letter arguing (inter alia) that federal law does not allow CMS to impose restrictions on the terms of arbitration agreements used by long-term care facilities.[9]

The CFPB's recent announcement that it is looking into whether the use of class action waiver clauses should be restricted or prohibited in connection with certain consumer credit products should be viewed as part of a larger, evolving regulatory framework that attempts to balance a public policy that is generally supportive of pre-dispute mandatory binding arbitration contracts against consumers' ability to obtain prompt and effective redress in case of certain systemic breaches of certain specific types of contracts that facilitate important social welfare policies, such as taxpayer-subsidized health care and retirement benefits, and similar consumer investments and transactions that receive special federal regulatory exemptions in furtherance of specific public policies. Regulators may be increasingly interested in protecting consumers' access to class-wide remedies for non-isolated breaches of these types of contracts, against the general right of parties to a private contract to agree to pre-dispute mandatory binding arbitration and class action waivers.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. Elizabeth can be reached at 203-776-1911 or by email at


[1] For a more detailed discussion of FINRA's role in regulating securities broker-dealers, see Charles Schwab & Co. v. Financial Industry Regulatory Authority, 861 F.Supp.2d 1063 (N.D. Cal. 2012).)

[2] See, e.g., SEC Release No. 34-55158, 72 Fed. Reg. 4574 (January 31, 2007).

[3] See 80 Fed. Reg. 66348 (October 28, 2015). The Securities Exchange Act was amended in 2012 to add a special exemption from securities registration requirements for certain types of "crowdfunding" engaged in by small businesses to raise capital from investors. (See, e.g., 15 USC Section 77d(a)(6).)

[4] See 80 Fed. Reg. 21960 and 21989 (April 20, 2015).

[5] See July 21, 2015 NASAA comment letter, copy available here and September 24, 2015 NASAA comment letter, copy available here.

[6] See July 21, 2015 AARP comment letter, copy available here.

[7] See, e.g., July 20, 2015 U.S. Chamber of Commerce comment letter, copy available here.

[8] See October 15, 2015 Attorneys General comments, copy available here.

[9] See October 14, 2015 comment letter by Andrew J. Pincus, Esq., of Mayer Brown LLP, on behalf of the U.S. Chamber of Commerce and the U.S. Chamber Institute for Legal Reform, copy available here.

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