SEC Reverses Policy, Allowing IPO Companies to Mandate Arbitration

The U.S. Securities and Exchange Commission (SEC) has reversed a long-standing policy, now permitting companies to mandate arbitration for shareholder disputes and thereby block class-action lawsuits. This significant policy shift allows companies preparing to go public to include clauses in their charters and bylaws that require investors to resolve claims of fraud or false statements through arbitration rather than court litigation. This move is widely perceived as a weakening of investor rights. The decision, which passed with a 3-1 vote along party lines, saw Republican commissioners in favor and the sole Democratic commissioner dissenting. The change was formalized through a policy statement, circumventing the typical public notice and comment period. SEC Chair Paul Atkins defended the action, asserting, "The commission is not a merit regulator that decides whether a company's particular method of resolving disputes with its shareholders is good or bad." Corporate interest groups and Republicans have long supported this change, arguing that companies require protection from what they view as the frivolous filing of shareholder class-action lawsuits. A similar policy change was considered during the Trump administration but was not enacted. Commissioner Caroline Crenshaw strongly criticized the policy in her dissent, warning that it would "open the floodgates" to mandatory arbitration and effectively deny many shareholders their rights. She argued that the policy would enable companies to conceal alleged misconduct from public view. Furthermore, she contended that without the ability to share legal costs in a class action, many harmed investors would be unable to afford to pursue legal action. Shareholder advocates, consumer advocates, and plaintiffs' lawyers also oppose this rule change.