SEC Issues Policy Statement Clarifying its Position on Mandatory Arbitration Provisions

On September 17, 2025, the SEC approved a Policy Statement clarifying the Commission’s views on issuers whose registration documents mandate arbitration of federal securities claims.  The announcement, which effectively condones the inclusion of arbitral clauses in registration documents, marks a significant policy shift at the SEC, giving public companies flexibility to limit the costs associated with securities litigation.

The Debate Over Whether Issuers Can Require Arbitration of Federal Securities Claims

Investors have certain private rights of action under the federal securities laws, including the ability to sue securities issuers and corporate insiders for alleged misstatements made in connection with the purchase or sale of securities.  Historically, most disputes have taken the form of class actions commenced in either state or federal court.  In recent years, though, practitioners have debated what role, if any, arbitration should have in resolving claims arising under the federal securities laws.  The debate is a heated one.  While proponents note arbitration’s ability to significantly reduce the costs associated with class actions, opponents have raised concerns about its potential to limit shareholders’ ability to form a class and exercise rights of appeal.  Practitioners have also raised the possibility that mandatory arbitration clauses may violate “anti-waiver” provisions of Section 14 of the Securities Act of 1933 (“Securities Act”) and Section 29(a) of the Securities Exchange Act of 1934 (“Exchange Act”), which generally provide that any provision designed to limit or eliminate an investor protection under the respective Acts is unenforceable. 

Rather than offer definitive answers, the SEC and the federal courts have, for years, perpetuated the debate.  While the Supreme Court issued decisions underscoring the strong federal policy in favor of arbitration, the SEC effectively prohibited IPOs for companies whose organizational documents contained mandatory arbitration clauses. 

The SEC’s Policy Statement Provides a Measure of Clarity for Issuers

The SEC’s September 17, 2025 Policy Statement marks a potential turning point by clarifying that mandatory arbitration provisions will not impact Staff determinations about whether to accelerate the effective date of a registration statement.   

By way of background, Section 8(a) of the Securities Act provides that a registration statement automatically becomes effective 20 calendar days after filing.  Securities Act Rule 473(a) permits an issuer to include a “delaying amendment” to extend the effective date to 20 calendar days after it complies with Rule 473(b), or for an indefinite period ending when the Commission grants the issuer’s request to accelerate the effective date.  In most registered offerings, issuers include an indefinite delaying amendment and, in addition, a request to accelerate effectiveness under Rule 461 of the Securities Act.  The Staff may, in turn, accelerate the effective date of a registration statement if it meets certain criteria under Section 8(a) and Rule 461.  The SEC’s revised stance means that the Staff’s focus during its review of acceleration requests will be on the adequacy of the surrounding disclosures and not on the inclusion of a mandatory arbitration clause.  

Although this policy change impacts companies looking to IPO, a range of other public companies may also benefit from the SEC’s revised position.  As the SEC made clear, its position also applies to Securities Act registration statements for other securities offerings, as well as to decisions to declare effective Exchange Act registration statements or to qualify offering statements for Regulation A offerings.  It will also extend to public companies that decide to amend their corporate charter or bylaws after their IPO.

SEC Chairman Paul Atkins described the Policy Statement as part of a broader initiative to “eliminat[e] compliance requirements that yield no meaningful investor protections, minimiz[e] regulatory uncertainty, and reduc[e] legal complexities throughout the SEC’s rulebook.”  Commissioner Hester Peirce lauded the move, citing potential advantages for issuers who, armed with the knowledge that “the SEC will not put its thumb on the scale” when it comes to the inclusion of arbitration provisions, can make “value-maximizing” decisions when they go to market. 

Commissioner Caroline Crenshaw, however, criticized the SEC’s action as “stack[ing] the deck against investors.”  Among other things, she noted that mandatory arbitration clauses could create barriers for shareholders lacking the resources to pursue arbitration on an individual, as opposed to collective, basis.  Commissioner Crenshaw also cautioned that a shift to arbitrating federal securities claims could result in under-policing of the markets and, in addition, lead to unpredictable outcomes. 

Implications for Public Companies: Clarity is Not Certainty

Although the SEC’s Policy Statement opens the aperture for mandatory arbitration provisions, questions remain about their enforceability.  The Policy Statement is not a pronouncement by the SEC that “arbitration provisions are appropriate or optimal for issuers or investors.”  Nor does it preempt state laws prohibiting such clauses.  Indeed, as the Policy Statement makes clear, it is not “within the Commission’s purview to conclude whether any particular issuer-investor mandatory arbitration provision is enforceable for purposes of the [Federal Arbitration Act],” reinforcing the risk that such provisions could face legal challenges.     

Accordingly, issuers weighing the adoption of a mandatory arbitration provision—whether in connection with a securities offering or in a post-IPO amendment—may wish to consider the following:

• The availability of arbitral provisions under state law.  Certain states and non-U.S. jurisdictions restrict the availability of mandatory arbitration provisions.  Delaware law, for example, mandates that forum selection provisions in Delaware charters and bylaws provide an opportunity to adjudicate claims in a Delaware court.  Other states, including Nevada and Texas, have yet to take a definitive stance on the enforceability of mandatory arbitration provisions.  Accordingly, companies contemplating the inclusion of mandatory arbitration provisions should analyze to what extent applicable state laws restrict their usage.  
• The advantages and disadvantages of arbitration. Even when they are available under applicable state law, mandatory arbitration provisions come with potential advantages and disadvantages that may impact their utility.  Arbitration may, on the one hand, limit litigation expenses, minimize management distraction, and reduce insurance premiums.  But it comes with certain risks, including the potential for reactive litigation and negative investor sentiment.  Arbitration also limits, or, in some cases, eliminates, substantive and procedural features of the court system that issuers may find favorable, including the possibility of dismissing meritless claims at the pleading stage, the opportunity to appeal unfavorable decisions, and the ability to resolve claims from multiple plaintiffs in a single proceeding. 
• The potential legal challenges stemming from post-IPO adoption of mandatory arbitration clauses.  Companies considering amendments to their charter or bylaws must grapple with additional considerations.   Chief among these is the risk that stockholders may bring breach of fiduciary duty claims if they perceive such amendments as providing a personal benefit to officers and directors—in the form of reduced liability exposure—at stockholders’ expense.  To best position themselves to defend against such claims, companies should undertake a thorough, documented, and well-reasoned analysis of the potential advantages and disadvantages of any proposed changes.
• Investor sentiment.  The foregoing considerations may play a significant role in whether key stakeholders, including institutional investors, will invest in companies with mandatory arbitration clauses.  Guidance issued by proxy advisory firms ISS and Glass Lewis may be instructive in this regard.  While it is premature to predict what positions they will take, both firms disfavor fee-shifting bylaws, a potential hallmark of arbitration.  Regardless, neither firm has outright opposed forum selection provisions.  ISS, for example, generally supports federal forum selection provisions for Securities Act claims, whereas Glass Lewis, which takes a “negative” view of federal forum provisions, has limited its support to specific situations. 
• Insights from insurance brokers and carriers.  Given the pivotal role they play in securities class action defense, insurance carriers and brokers may have the broadest visibility into the advantages and disadvantages of arbitrating federal securities claims.  It is therefore important to partner with these industry professionals to understand the potential implications of such clauses on insurance premiums and litigation risk. 

Companies that decide to include mandatory arbitration provisions in their organizational documents should carefully consider how they are structured and disclosed to investors. 

• Drafting considerations.  Securities litigation presents unique considerations that may play a role in the drafting process.  Companies should consider, for example, pre-selecting arbitration institutions that will allow issuers to move to dismiss and file other pre-trial dispositive motions—rights that are not necessarily available through every arbitration institution.  The choice of arbitral institution may also have a bearing on the availability of consolidation or coordination, the desirability of which will depend on the issuer’s objectives.  Finally, to minimize the risk of multi-forum disputes, companies should be thoughtful about whether the provision also provides coverage for company-indemnified defendants, including directors, officers, and underwriters.

• Adequacy of disclosure. Other drafting considerations relate to the manner in which mandatory arbitration provisions are disclosed to investors.  Going forward, the Staff will likely be attuned to ensuring that a company’s disclosure explains how mandatory arbitration provisions operate, how they may impact stockholders, and any residual legal questions regarding their enforceability. 

Concluding Thoughts on the Potential Paradigm Shift

Although the SEC’s Policy Statement could shift the paradigm for litigating federal securities class actions, it remains to be seen to what extent it will catalyze change.  Even though the SEC concluded that its stance is consistent with Supreme Court precedent, the Commission’s view is not dispositive, particularly after the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), eliminating Chevron deference to agency interpretations of the statutes they administer.  Securities litigants are likely to exploit Loper in efforts to challenge the legality of the SEC’s position and, by extension, the enforceability of mandatory arbitration clauses.  Ultimately, while the future of mandatory arbitration for federal securities claims remains uncertain, the SEC’s evolving stance signals a shift in the regulatory landscape that could reshape how private securities disputes are litigated and resolved.