Yesterday, the Commission, by a three-to-one vote, approved a policy statement that revisits the decades-long approach of the Staff not accelerating the effective date of registration statements for companies with mandatory arbitration provisions in their organizational documents, citing Securities Act Section 8(a), which allows the Commission to refuse to accelerate the effective date of a company’s registration statement upon considering, among other things, the adequacy of the disclosure in the registration statement, the public interest, and the protection of investors.

Historically, mandatory arbitration provisions have been viewed by the SEC as being inconsistent with the “anti-waiver” provisions of the federal securities laws, notably Securities Act Section 14 and Exchange Act Section 29(a), which state that any condition that would bind a person to waive compliance with those laws is void. In two specific instances over the course of the past forty years, the Staff in Corp Fin has refused to declare Securities Act registration statements effective when the issuer had included mandatory arbitration provisions in its organizational documents. The possibility of revisiting the SEC’s policy regarding mandatory arbitration provisions has been discussed over time, including during the first Trump Administration, but the policy has remained in place until now.

In the new policy statement, the SEC states:

This statement concerns requests to accelerate the effective date of registration statements filed under the Securities Act of 1933 (“Securities Act”) by issuers with a mandatory arbitration provision for investor claims arising under the Federal securities laws (“issuer-investor mandatory arbitration provision”). As discussed in further detail in section II.C. there have been a number of developments involving the U.S. Supreme Court’s (“Supreme Court” or “Court”) interpretation and application of the Federal Arbitration Act of 1925 (“FAA” or “Arbitration Act”) that inform such acceleration requests. In addition, as discussed in further detail in Section II.B., potential uncertainty exists regarding the intersection of the FAA and state law. For example, Delaware recently amended its General Corporation Law in a way that may prohibit certificates of incorporation or bylaws from including an issuer-investor mandatory arbitration provision. Other states may adopt different approaches on this issue. Notwithstanding these developments and potential uncertainty, the Commission has not spoken publicly on this topic even though, during the registration process, issuers have on occasion sought to include such a provision in their Securities Act registration statements.

In order to provide issuers with greater certainty concerning the Commission’s approach to requests to accelerate the effective date of a registration statement disclosing an issuer-investor mandatory arbitration provision, we are issuing this policy statement. For the reasons explained in this statement, we have determined that the presence of an issuer-investor mandatory arbitration provision will not impact decisions whether to accelerate the effectiveness of a registration statement under the Securities Act. Accordingly, when considering acceleration requests pursuant to Securities Act section 8(a) and Rule 461 thereunder, the staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.

The policy statement goes on to note: “[n]othing in this statement should be understood to express any views on the specific terms of an arbitration provision, or whether arbitration provisions are appropriate or optimal for issuers or investors.” In expressing his support for the policy statement, Chairman Atkins stated:

While many people will express views on whether a company should adopt a mandatory arbitration provision, the Commission’s role in this debate is to provide clarity that such provisions are not inconsistent with the federal securities laws. It will fulfill that role through the issuance of the Policy Statement.

Commissioner Crenshaw opposed the SEC’s action, noting in a lengthy statement:

Mandatory arbitration forces harmed shareholders to sue companies in a private, confidential forum, instead of a court and without the benefit of proceeding in the form of a class action. While, in theory, arbitration could cut costs for companies, there are real downsides for investors. Arbitrations are typically more expensive for individual shareholders; they are not public; they have no juries; they lack consistent procedures; arbitrators are not bound by legal precedent; arbitration precludes collective action among shareholders; there are limited rights of appeal; and, ultimately, there is no assurance that two identical investors would get the same outcome. If that collection of things transpired in a courtroom without a party’s consent, judges would not hesitate to call it what it is: a violation of due process.

Today, the Commission takes two steps to advance this policy goal. First, the Commission issues a policy statement dictating that staff make public-interest findings without considering whether a corporation has forced its shareholders into mandatory arbitration. And, second, we amend the Rules of Practice to ensure that no Commissioner or third party can effectively intervene to challenge those public-interest findings.

The policy statement fails on many fronts. It fails to identify a problem. It fails to adequately address numerous and complex legal and economic issues. And it fails entirely to discuss the practical consequences of allowing public companies to mandate arbitration. If, however, we actually were to consider whether mandatory arbitration is in the public interest—an analysis required by the Securities Act—we would face overwhelming evidence that it is not. So, to start there, what are some of those consequences?

For public companies and companies that are contemplating going public, the change in SEC policy now raises the question of whether the adoption of mandatory arbitration provisions for securities law claims is a possibility. As the Commission noted in the policy statement, whether issuer-investor mandatory arbitration provisions can be included in a company’s organizational documents depends on state corporate laws, and some states, such as Delaware, have enacted laws that may prohibit the implementation of such provisions. The Commission’s action will likely also prompt a broader debate over whether mandatory arbitration provisions are advisable from the perspective of issuers and investors. Through the policy, the Commission is not necessarily weighing in on this debate, but is rather getting out of the way (for better or worse) by not using the acceleration of effectiveness process to discourage the use of such provisions.

– Dave Lynn