Registration statement effectiveness won't be impacted by mandatory arbitration clauses according to the newest SEC policy statement.
On September 17, 2025, the US Securities and Exchange Commission (SEC) published a policy statement announcing a significant change in its stance regarding arbitration provisions in public companies. The new policy focuses on the adequacy of disclosure in registration statements, including any arbitration provisions, and clarifies that such provisions are not inconsistent with federal securities laws.
Prior to this policy shift, the SEC had followed an unwritten policy of not accelerating the effectiveness of registration statements for companies with mandatory arbitration provisions. However, the new policy provides public companies more flexibility to avoid costly actions in federal courts by requiring shareholders to pursue claims in private arbitration.
Commissioner Crenshaw, in a cautionary note, highlighted potential concerns about the impact of mandatory arbitration on market transparency and integrity. He pointed out that without court opinions in shareholder litigation, market transparency may suffer, and the deterrent effect of such litigation could be reduced due to the non-public nature of arbitration claims and awards.
Furthermore, Commissioner Crenshaw expressed concern that many shareholders may not be able to afford the significant upfront fees required for arbitration in complex cases. This could potentially prevent small shareholders from vindicating their rights due to high arbitration costs.
The SEC has declined to express a view regarding whether arbitration provisions are appropriate or optimal for issuers or investors. Instead, it has left the decision to the companies, stating that its role is to provide clarity on the legality of such provisions.
The widespread adoption of mandatory arbitration provisions will depend on institutional investor reactions. Delaware, a key jurisdiction for corporate law, recently banned mandatory arbitration clauses, which could influence other states and jurisdictions.
The new policy may result in significant cost savings for public companies by avoiding shareholder class actions. However, the debate over whether a company should adopt a mandatory arbitration provision is complex, with opinions divided. Commissioner Hester Peirce noted that companies can decide whether to include arbitration provisions, and whether some public companies are correct in their assessment that mandatory arbitration clauses could be 'value-maximizing' should be up to the market to decide.
On the other hand, Commissioner Caroline A. Crenshaw criticized the SEC's policy as 'stacking the deck against investors.' She argued that the policy could disadvantage individual investors, who may have fewer resources to pursue claims in arbitration compared to large corporations.
It's important to note that state laws and the laws of non-US jurisdictions where the company is organized may affect a company's ability to include a mandatory arbitration provision. Companies going public through Initial Public Offerings (IPOs) now have the possibility to include provisions in their bylaws or charters that require arbitration of investor claims under federal securities laws.
In conclusion, the SEC's new policy provides clarity on the legality of arbitration provisions in public companies. However, the debate over their appropriateness and impact on investors and market transparency continues.
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