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Securities law focus: class-action waivers in investment contracts

The Financial Industry Regulatory Authority has for years had a pro-consumer rule that seeks to provide protection against broker abuse by enabling victims of wrongdoing to band together in litigation.

What the Finra policy is specifically aimed at are waivers that companies might seek to insert into broker/client agreements that effectively eliminate any possibility for customers to collectively pursue a grievance through a class-action litigation filing.

The publication Investment News notes that, while investment firms have occasionally tested Finra on waivers, the industry has been virtually compliant across the board for several years now.

That could change.

The U.S. Senate voted just last week to strike down a projected rule recently drafted by the Consumer Financial Protection Bureau that is similar to Finra's mandate. The Senate's action -- opposed by every Democratic senator and supported unanimously by Republicans -- eliminates any recourse for aggrieved consumers to resolve disputes against financial institutions through class action litigation.

Some commentators are now wondering whether Finra's no-waiver stance will be next in line for a stark legislative challenge fueled by pro-business GOP sentiments and a White House that has clearly signaled its support for class-action waivers.

"[T]here are brokerage firms that are salivating at the vote … and likely eyeing Finra's rule," says one legal analyst.

"I think financial institutions have to think they're [now] on a roll, states another close observer of recent developments. She says that Finra can reasonably expect a strong industry challenge to its policy in the near future.

We'll keep an eye on the matter and keep investors and regular readers of our blog timely updated on any material developments that occur.

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