SEC Says Arbitration Clauses Won’t Impact Acceleration of Registration Statements
Commentary by Steven Lofchie
In a policy statement, the SEC said the existence of mandatory arbitration clauses "will not impact determinations whether to accelerate the effective date of a registration statement."
In the release, the SEC said that the presence of mandatory arbitration clauses will not affect acceleration decisions under Section 8(a) ("Cease-and-desist proceedings") of the Securities Act. The SEC stated that staff will instead focus on the adequacy of disclosures in the registration statement, including clear disclosure of any arbitration requirement. The SEC explained that recent Supreme Court precedent under the Federal Arbitration Act confirms that federal securities statutes do not override the Act’s strong policy favoring arbitration. The SEC also noted potential state law considerations, such as Delaware’s 2025 amendment restricting certain arbitration clauses, but emphasized that enforceability questions fall outside its mandate.
The SEC stated that the policy is intended to provide issuers with greater certainty and predictability in the registration process. The SEC clarified that while the statement does not create new obligations, it may influence issuer behavior, as some may consider adopting arbitration provisions now that acceleration decisions will not be impacted. The SEC said the policy will become effective upon publication in the Federal Register.
Commissioner Statements
- SEC Chair Paul S. Atkins said federal courts, including the Supreme Court, have long confirmed that arbitration clauses are consistent with securities laws, but the SEC had not clarified its stance since the 1980s, creating uncertainty for issuers. He emphasized that the SEC’s role is limited to disclosure, not judging arbitration’s merits, and noted that enforceability under state law, such as Delaware’s recent amendments, is beyond the agency’s authority.
- SEC Commissioner Hester M. Peirce argued the SEC should have clarified its position much earlier, criticizing decades of silence despite clear precedent. She said prior SEC signals created unnecessary uncertainty for IPO issuers and maintained that whether arbitration benefits shareholders should be left to companies and the market.
- SEC Commissioner Mark T. Uyeda asserted that the policy statement properly confines the SEC’s role to disclosure review, not judgments on arbitration. He stressed that the agency is not positioned to resolve conflicts between the FAA, securities laws, and state law, and its responsibility is limited to ensuring investors receive adequate information.
- SEC Commissioner Caroline A. Crenshaw opposed the policy, warning it shuts the door on investors and ignores the SEC’s duty to consider the public interest. She argued that mandatory arbitration will (i) prevent small shareholders from vindicating rights, (ii) weaken private enforcement, (iii) undermine deterrence by keeping outcomes confidential, (iv) erode transparency by replacing precedent with inconsistent decisions, and (v) strip investors of meaningful choice. She said the SEC has predetermined outcomes without proper analysis or input, leaving investors with fewer protections.
Democratic Senators' Letter
In a comment letter to SEC Chair Paul Atkins, Senators Elizabeth Warren and Jack Reed urged the SEC to maintain its long-standing opposition to mandatory arbitration provisions in public company charters. The Senators argued that reversing course would conflict with Section 14 ("Contrary stipulations void") of the Securities Act and Section 29(a) ("Validity of contracts") of the Exchange Act. They further warned that such a shift would (i) deny investors access to courts, (ii) weaken class actions as a critical enforcement mechanism, (iii) reduce market transparency and accountability, and (iv) allow corporate misconduct to go unpunished at a time when SEC enforcement resources are already under strain.
Commentary
Senators Warren and Reed's assertion that mandatory arbitration is inconsistent with Section 14 of the Securities Act or Section 29 of the Exchange Act was expressly rejected by the U.S. Supreme Court in Shearson/American Express v. McMahon, 482 U.S. 220 (1987). That case held that the Federal Arbitration Act "establishes a federal policy favoring arbitration." That is not inconsistent with either provision of the Securities Laws cited by the Senators. If the Senators seek to overturn the Supreme Court's understanding of the Arbitration Act and the Securities Laws, the proper course for the Senators would be to propose corrective legislation. As Commissioner Peirce said - and in the absence of Congressional action - it was inappropriate for the SEC to use regulatory procedures to discourage mandatory arbitration.